Is a 1-4 sales contract used in a refinance from owner finance to conventional?

Question

My lender is trying to get me to sign a 1-4 sales contract with things like a gift of equity from old owner, calling her the seller and me the buyer, but I am not the buyer. I've owned this home for six months. The only tie to the old owner is her holding the note for loan. She is not the seller.

Matt Devincenzo · Answer

You said you purchased, but do you know how you purchased? It sounds like you may have purchased via a CFD/Land Contract meaning you were not deeded the property, which is a perfectly legitimate way to buy property in many areas. But that may be why the lender is now trying to execute a PSA...I don't know if that is the right way to accomplish the 'refi' or not, but that would explain part of what may be happening here.

Brandon Croucier · Answer

I've seen cases where people "purchase" a home with seller financing but end up never being owner on title. They rehabbed the whole thing and never had a legal binding vested interest in the property. Always consult attorneys.

Are you 100% sure your on title?

Patrick Roberts · Answer

Something is very wrong here. Either your lender is an idiot or you dont actually own this property. Not enough info to determine anything outside of this observation.

Patrick Roberts · Answer

CFD was my first thought, as well. The lender should be treating it as an installment sale if this is the case and not requesting a new PSA.

Ko Kashiwagi · Answer

Hi Abigail,

There are times lender may require further documentation to prove the transaction took place (and sometimes require proof of consideration) but it doesn't make sense that they are making you sign the purchase contract now if you are already on title, unless he's making you forge documentation.

If you are not on title and they are structuring this deal as a purchase, then it could be a different story.

Tienna Matthews · Answer

You are right to be cautious. A 1–4 family residential sales contract (like the TREC one in Texas) is typically used for a purchase transaction, not a refinance. Here’s what’s going on and why it’s problematic based on your description:

Your Situation (Summarized):

→You already own the home—you purchased it via owner financing 6 months ago.

→The previous owner (seller) carried back the financing and holds the note.→Now you’re trying to refinance into a conventional loan, and your lender is asking you to sign a purchase contract that labels the old owner as the seller again and includes terms like a gift of equity.

Why this is a red flag:→You are not buying the house again — you already hold title.→Calling it a sale misrepresents the transaction type.→A "gift of equity" typically applies when a family member sells you a home below market value, not when converting seller financing into a conventional refinance.→It could be seen as fraudulent by the lender or underwriters if it disguises the true nature of the transaction (i.e., a refinance, not a new sale).

What should be happening:

→For a refinance of an owner-financed home, the proper path typically looks like.→You submit refinance documents (not a sales contract).→The lender orders a title search and confirms you’re the owner of record.→The previous owner's note is paid off at closing.→There is no “gift of equity” needed or appropriate—because you already own the equity.→They may be mistaken about the structure of your current ownership.                                                                                                                                               →They could be trying to fit your case into a loan program that only accepts purchases, which is inappropriate.→Less charitably, someone might be trying to misrepresent the nature of the transaction to get the deal through underwriting—this can get you in legal and financial trouble.

What should you do:

→Do not sign the sales contract unless/until a real estate attorney reviews it.→Clarify in writing to your lender that you are already the owner.→This is a refinance, not a new purchase.→You will not sign documents that falsely portray a sale.→Consult a real estate attorney in your state.

If your lender insists, consider switching lenders; because they may be pushing something non-compliant.

Is a 1-4 sales contract used in a refinance from owner finance to conventional?

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