Can the buyer in a land contract place a mortgage on the property before completion of the land contract?

Land contract buyer vendee is 2 years into a 10 year land contract. Buyer records a mortgage using the property to secure a loan with a third party private lender mortgagee. Is this legal?

Asked on October 23, 2017 under Real Estate Law, Michigan

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

Who has title? If title was transferred to the buyer already, even though they have not completed paying, then they could mortgage the property as the title holder, though any mortgage would be subject to your rights (if any) under the contract to foreclose and recover the property if they fail to make payments, since that agreement pre-dated the mortgage and has priority. (E.g. you would be treated as the first mortgagee.) 
If title did not transfer to them yet, they could not mortgage the property: no one may mortgage or encumber what they do not own.
The above applies to a traditional mortgage encumbering and putting a security interest on the property. A lender *could* lend to them in exchange for *their* right to the property, but in that case, gets no more rights than the buyer themselves have, and cannot again, encumber, put a lien on, foreclose on, etc. the property--all they could do, at most, is exercise the buyer's right to get the property if all payments are made.


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