Q: How does a land contract work. The seller still has a mortgage on the house. What will happen if the seller dies. .
My father-in-law would like to sell my husband and I his house on a land contract. My father-in-law still has a mortgage on the house currently but he was diagnosed with Cancer and put on Hospice. Can we use a land contract to obtain the house.
A: You should examine the mortgage documents carefully. Usually, the bank will have a lien on the house, as a secured interest on the property, superior to all of the other lien holders. Therefore, if your father-in-law should die, his heirs (the people he names in his Will if he has one, or the heirs as determined under the laws of intestacy if he has no Will) would receive his house through his probate estate. After your Father-in-law's death, his Estate would take ownership of the house, subject to the mortgage, meaning the Estate would own the house, but would be required to pay off the mortgage on the house if the house is sold. Usually an Estate seeks to sell or transfer the house within one calendar year in order to avoid filing an Estate Tax return for multiple years after a person's death. If your father has equity in the home, it is possible he could begin selling you the home on a land contract, however you should be aware, that what you are buying is still subject to the mortgage on the property. Therefore, you would want to make sure that his equity in the house far exceeds the mortgage on the property. If you buy a property on a land contract subject to a mortgage, you will still be responsible for paying off the mortgage if a mortgage exists when the land contract holder dies, or you reach the end of the land contract payment period. Land contracts inherently contain certain risks to the Buyer, but they become even riskier when there is a first mortgage on the property.
I recommend sitting down with a qualified estate planning attorney in your area who can examine all of the facts here and lay out your best options in this situation. There are certain tax benefits to inheriting property upon someone's death that may factor into this analysis as well. The facts surrounding the exact amount of the mortgage and equity in the home, as well as your father-in-law's current health situation will be critical in determining the best course of action here.
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