6. Loan Transactions for Paying Off Land Contracts

Introduction

This topic contains information on loan transactions to pay off land contracts, including

•	financing limit when paying off land contracts

•	LTV ratio when paying off land contracts, and

•	using equity when paying off land contracts.

Change Date

May 10, 2009

4155.1 2.B.6.a Financing Limit When Paying Off Land Contracts

If a borrower does not receive cash at closing, his/her new mortgage may be processed as a purchase or refinance transaction with maximum FHA-insured financing if he/she uses the loan to

•	complete payment on a land contract

•	contract for deed, or

•	other similar type of financing arrangement in which the borrower does not have title to the property.

4155.1 2.B.6.b LTV Ratio When Paying Off Land Contracts

When the loan proceeds are used to pay the outstanding balance on the land contract and eligible repairs and renovations, the LTV ratio is applied to the lesser of the

•	appraised value of the land and improvements, or

•	total cost to acquire the property (which includes the original purchase price, plus any documented costs the borrower incurs for rehabilitation, repairs, renovation, or weatherization), plus
	–	closing costs, and
	–	reasonable discount points, if treated as a refinance.

References: For additional information on

•	refinances, see HUD 4155.1 3.B.1, and

•	use of rent credits, see HUD 4155.1 5.B.6.f.

4155.1 2.B.6.c Using Equity When Paying Off Land Contracts

Equity in the property (original sales price minus the amount owed) may be used for the borrower's entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the sum of the appraised value.

Replenishing the borrower's own cash expended for repairs, improvements, renovation, or weatherization is not considered as “cash back,” provided that the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds for the improvements.