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Advantage of Fixed Price

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One important advantage of the installment contract approach to home purchase is that the buyer can often lock in a purchase price, even if the actual purchase transaction is still years away. The benefit of this is that such a fixed price can beat inflation by taking advantage of anticipated appreciation.
Consequently, even if the buyer and seller agree to a market price today, the buyer will be purchasing the property at a premium value (because of its equity appreciation) a few years later.
For example, consider the scenario of Lorna who wishes to buy a $90,000 property with an installment contract—and with no down payment. After three years, the property’s value appreciates to (hypothetically)
$100,000. During that same period, Lorna’s monthly payments lower the principal balance to $80,000.
Thus, when Lorna applies for a refinance, she will be applying for a mortgage loan of $80,000 on a property worth $100,000—therefore, she has established $20,000 in equity without really trying.
$90,000 Sales price on installlment contract
$100,000 Appraised value at time of purchase completion
$80,000 Balance on installment contract sales price after three years
$20,000 Property’s built-in equity at time of purchase completion

If she wanted to, Lorna could take out a second mortgage on her equity of $20,000. She could then use that second mortgage loan to consolidate other debts, arrange home improvements or make a down payment on another property. She could also decide to sell it.

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Completion of the purchase

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As indicated above, the buyer must complete the purchase within the prescribed loan term. Completing the purchase entails a mortgage loan to refinance the installment contract, which is essentially a seller-financing arrangement.
The mortgage loan that the buyer will need is a refinance, with some adjustments. Because it is a refinance, no down payment is required. The property’s available equity can be used for the down payment and closing costs.
For refinances, however, most mortgage lenders require the installment contract to be “seasoned” at least 6-12 months. If that seasoning requirement is not met, most lenders will treat the financing as a purchase loan and require an actual down payment.
The buyer must pay the monthly installment payments with a personal check, and then retain the canceled checks. The lender will require copies of the canceled checks to support the buyer’s credit history and ensure that the buyer has been making the monthly payments on time. In a sense, the installment contract becomes a training regimen for first-time home buyers or investors. As such, it is crucial that the buyer make all contract payments on time—in addition to maintaining overall good credit.