The risk sits with you. Your name stays on the mortgage, and if the buyer stops paying, your lender still expects its payment every month while you work through a Michigan forfeiture case.

This is general information, not legal or tax advice. Have a Michigan real estate attorney read your loan papers and contract before you sign.

What is an owner carry loan?

An owner carry loan is a sale where you carry the financing: the buyer pays you over time instead of borrowing from a bank. It's also called owner financing, seller financing or a carry mortgage.

In Michigan it usually takes one of two forms:

On a land contract, you keep legal title until the price is paid. The buyer gets equitable title, the right to full ownership at payoff, and usually pays the taxes, insurance and repairs.
With a purchase money mortgage, you deed the house to the buyer and take back a mortgage for the unpaid price.

Michigan caps a private seller's interest rate on either at 11% a year. On a house you own free and clear, this is plain owner financing, covered in our guide to selling a house by owner financing in Michigan. With a loan still open, the deal also has to fit your mortgage.

Can you owner finance a home with a mortgage on it?

Nothing stops you from signing the contract. What you can't control is your lender's response, because the sale gives it the right to call the whole loan.

The standard Fannie Mae and Freddie Mac mortgage form for Michigan covers interests transferred in a "bond for deed, contract for deed, installment sales contract, or escrow agreement" meant to pass title later. If any interest is sold or transferred without the lender's prior written consent, the lender "may require immediate payment in full." Three parts of that clause matter here:

The clause says "may," so the lender decides whether and when to act. Nothing in it sets a deadline.
If the lender calls the loan, you get at least 30 days to pay the full balance. After that it can use its remedies, including a foreclosure sale.
The form's right to reinstate a loan by catching up does not apply when the lender calls it over a transfer.

Federal law backs the clause. The Garn-St Germain Act of 1982 lets a lender enforce it notwithstanding any state law to the contrary.

Do the Garn-St Germain exceptions cover owner financing with an existing mortgage?

No. The law lists transfers a lender can't treat as a sale, and a sale to a buyer on a land contract, a wrap or a lease with an option to buy isn't one of them.

For a home with one to four units, 12 U.S.C. 1701j-3(d) bars the lender from calling the loan over:

a transfer when a joint owner dies, or to a relative after the borrower's death
a transfer that makes your spouse or children owners, or one under a divorce decree
a transfer into a living trust where you remain a beneficiary
a second lien that doesn't transfer the right to live there, or a lien for household appliances
a lease of three years or less with no option to buy

The federal regulation, 12 CFR 191.5, narrows these for loans on homes the borrower lives in. The second-lien exception does not cover a lien created under a contract for deed. And "either a lease of more than three years or a lease with an option to purchase will allow the exercise of a due-on-sale clause." Rent-to-own is often pitched as a way around the clause, and that line rules it out.

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What are the safer ways to offer owner financing when you still owe?

Each safe version deals with the lender up front:

Written consent: the clause covers transfers made without the lender's prior written consent, so ask in writing before you sign anything with a buyer. Lenders don't have to agree.
An assumption: the buyer takes over your loan with the lender's approval. Garn-St Germain encourages lenders to allow assumptions at the existing rate, or at a rate no higher than the average of that rate and the market rate. Under the federal regulation, a lender that agrees in writing before the transfer to make your buyer liable gives up the clause for that transfer and must release you.
A payoff from the down payment: if you owe $25,000 and the buyer puts $30,000 down, the loan is paid at closing. The house is then free and clear, and you carry the rest with no clause left to trigger.

How do wraparound and land contract deals work in Michigan?

In a wrap, your mortgage stays in place and you sell on a land contract for more than you owe. The buyer pays you, and you pay your lender out of that payment.

Say you owe $60,000 at 4% with 20 years left, about $364 a month in principal and interest. You sell for $100,000 with $10,000 down and carry $90,000 at 7% over 30 years. The buyer pays you about $599 a month, so about $235 is yours after your lender is paid, before taxes and insurance. You keep that spread only while the buyer pays on time and the lender leaves the loan alone.

The structure adds risks a plain sale doesn't:

The buyer has no contract with your lender. A payment that reaches the lender late is your late payment.
Michigan Legal Help tells land contract buyers to search the title first, because existing liens can limit their rights. Your mortgage is one. If it goes unpaid, the lender's foreclosure reaches the house the buyer is paying you for.
Under Michigan's property tax law a land contract is a transfer of ownership, so the taxable value is adjusted the year after you sign.

Selling "subject to" your loan, where you deed the house over and the buyer makes your payments, hits the same clause, since a deed sells the property outright.

What federal seller-financing rules apply when you carry the loan?

For a homeowner selling one house, the CFPB's Dodd-Frank rules are light if the loan terms fit:

One property in 12 months: an individual, estate or trust that owns the house, didn't build it as a business and finances only that sale isn't treated as a loan originator. The payments can't cause negative amortization, and the rate must be fixed or adjustable only after five or more years, with reasonable limits.
Up to three properties in 12 months: any seller can use this test, but the loan must be fully amortizing, so no balloon, with the same rate rule. You also have to decide in good faith that the buyer can reasonably repay.
Six or more a year: Regulation Z treats you as a creditor once you've extended credit secured by a dwelling more than five times in the preceding calendar year, or made more than one high-cost mortgage in 12 months.

The fixed 7%, 30-year contract above fits either test on its terms. None of this changes your mortgage, so it does nothing about the due-on-sale clause.

What happens if your buyer stops paying?

Your mortgage payment stays due every month while you take the house back, and Michigan builds waiting periods into that process.

Forfeiture is the remedy most Michigan sellers use. The statutes and Michigan Legal Help set out the steps:

The contract has to have a forfeiture clause, or you can't use this route.
You serve a written notice of forfeiture. The buyer has 15 days, or longer if the contract says so, to catch up or move out.
If the buyer doesn't cure, you file in district court for a judgment for possession.
After judgment, the court can't order the buyer out for 90 days if less than half the price has been paid, or six months if half or more has. If the buyer pays the judgment amount in that time, the buyer keeps the house.

The other route is foreclosing the land contract in circuit court. A land contract seller can't foreclose by advertisement, and the buyer gets six months to redeem after the sheriff's sale.

In the wrap example, if eight months pass between the first missed payment and getting the keys back, you'd pay roughly $2,900 in principal and interest with nothing coming in. Taxes, insurance, court costs and repairs come on top.

When is a sale that pays off the mortgage the safer choice?

When your lender won't consent, or when you couldn't cover the mortgage through a buyer default. In a regular sale the title company pays your loan from the price at closing, and the clause never comes into play.

Owner financing has real upsides. Michigan Legal Help notes that land contracts can make a house easier to sell because the seller sets the credit requirements and down payment. You also earn interest on what you carry. Our post on seller financing pros and cons weighs them.

With a mortgage still open, the cleaner routes end with the loan paid:

List the house: if it's in good shape and you have a few months, a listing can bring full market value. Our guide to selling a house with a mortgage shows how the payoff works.
Sell to us for cash: we buy as-is, with no repairs, showings or agent commission, and your mortgage is paid from the sale at closing. We pay fair prices, but not always full market value. For houses needing repairs, we calculate fair prices by subtracting repair costs. We can make an offer within 24 hours. We can close in as little as 7 days when the title is clear; 30 to 60 days is typical. See how we buy houses.

Owners untangling a land contract that never got recorded cleanly call us too, and that's ordinary work for us, as our Inkster page says. If the monthly payments are what's pushing you toward owner financing, read what to do when you're behind on mortgage payments first.

Frequently asked questions

Is an owner carry loan the same as a carry mortgage?

Mostly, yes. Both mean the seller carries the financing and the buyer pays the seller over time. A carry mortgage, or carry-back mortgage, usually means the seller deeds the house over and takes back a mortgage. In Michigan the same idea often runs through a land contract, where the seller keeps legal title until the last payment. Either way, the rate is capped at 11%, and either one can trigger your own lender's due-on-sale clause.

Will my lender find out if I sell on a land contract?

Plan as if it will. The buyer has to report the transfer to the local assessor within 45 days, and the register of deeds tells the assessor about recorded transfers at least monthly. Michigan Legal Help suggests buyers record their interest, so a quiet deal means asking your buyer to give up a protection. If your plan depends on the lender never noticing, talk to an attorney first.

Can my buyer take over my FHA loan instead?

Often, yes. HUD's handbook says all FHA-insured mortgages are assumable. For a loan closed on or after December 15, 1989, the person taking it over has to pass the lender's credit review. Once a creditworthy buyer agrees to assume and pay the debt, the lender prepares a release so you're no longer liable. If the buyer can't cover your equity in cash, ask the lender whether you can carry a second loan for the difference.

How is an owner carry loan taxed?

The IRS generally treats it as an installment sale. You report the gain a piece at a time as payments come in, on Form 6252, and report the interest as ordinary income. The contract needs adequate stated interest, or the IRS can treat part of the principal as interest using the applicable federal rate. Debt the buyer assumes or takes subject to counts toward the price, so ask a tax adviser before you set terms.

Compare your options at your own pace

If you'd like to see what a sale that pays off your mortgage would leave you, we can put a no-obligation cash offer next to your payoff and your owner financing numbers. Read how we buy houses, contact us, or call (313) 217-9851. No pressure, and no rush.

Can You Offer an Owner Carry Loan With a Mortgage on the House? Michigan Rules