If an owner is financing a sale and their name remains on the deed, is the house technically

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If an owner is financing a sale and their name remains on the deed, is the house technically

We are buying a home from a close family friend. He doesn’t want to go through a bank and simply wants us to pay him directly. We have a contract already being drawn up. He is having our names added to the deed alongside his own until we’ve paid the balance off and his name will be removed. He still has a mortgage on this house, however I’ve read that depending on the mortgage contract, he might have to pay the mortgage in full before he

Asked on August 27, 2019 under Real Estate Law, Pennsylvania

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 1 year ago | Contributor

Yes, if he almost certainly has to pay the mortgage in full before putting anyone else on the deed; if he fails to do so, he will be in violation of the mortgage and the bank could foreclose.
Here's why: the bank loaned him money in exchange for getting a security interest in the home--the right to foreclose and sell it to recoup its  loss if he doesn't pay the mortgage. A "whole" home is worth more than a one-half or one-third interest in it: putting people on the deed would dilute the ownership of the house and so it's value. It would also complicate foreclosure, since more people are involved. Your friend cannot legally do that: he cannot reduce the value or accessibility (ability to foreclose) of the security (the right to foreclose on the house) he gave the lender in exchange for the money, since doing so violates his contract (the mortgage is a contract) with them. So  doing this breaches the mortgage; the breach lets the bank call the mortgage due and foreclose if it is not paid; and since the mortgage was filed first, before any deed changes your friend tries to make, the mortgage supercedes them, so the bank *can* foreclose despite him trying to put your names on the property. 
What you propose runs the risk of you paying your friend money and you losing the home. Don't do this. This kind of owner financing only works if there is no mortgage or the owner is willing and able to pay off the mortgage when he does this.


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