NEW YORK — Sue and Douglas Reed knew no bank would give them a mortgage — not with a bankruptcy and two foreclosures fresh in their credit history.

They turned to Hilarie Walters, whose childhood home on 15 acres in Marshall, Mich., had been on the market since 2009. The unemployed single mother of twins agreed in December to sell the property to the Reeds for $105,000. She also consented to a risky payment plan that in effect makes her the couple’s mortgage lender.

Financing provided by home sellers, popular in the 1980s when mortgage rates reached 18 percent, is making a comeback in some markets.

It’s showing up in places such as Michigan that have been hit hard by foreclosures and where tightening lending standards and years of economic distress have drained the pool of creditworthy buyers. For a small but growing number of people, it’s the only way to get a deal done.

“This is the American dream, and we’re going for it no matter what,” said Sue Reed, 56, who sells snacks from a trailer at estate auctions and going-out-of-business sales. “We’ll either make it or it will break us.”

Michigan, where unemployment is 10.3 percent, leads the nation with about 1,600 home listings advertising seller financing, according to Trulia Inc., a San Francisco-based real estate information company. It is followed by Florida, Ohio, California, Wisconsin, Minnesota and Texas.

Last year, 52,991 U.S. homes were purchased with various forms of owner financing, up 56 percent from 2008, said Realtors Property Resource, a subsidiary of the Chicago-based National Association of Realtors, citing data collected from county-record offices. Such deals accounted for 1.5 percent of all transactions in 2010.

“Anytime the market is in this much trouble, people have to find ways to get it to function,” said Dennis Capozza, a professor of finance at the University of Michigan in Ann Arbor. Capozza has direct experience with seller financing: He purchased a friend’s foreclosed home a couple years ago and allowed him to buy it back in installments.

Home sales, weighed down by a 9 percent national jobless rate and tight credit, have languished even as 30-year mortgage rates remain below 5 percent. Loans insured by the Federal Housing Administration carried an average FICO score of 703 in March, compared with 629 two years earlier, highlighting that lenders are requiring stronger credit histories. FICO scores range from 300, the least creditworthy, to 850 for the best borrowers.

“The market is locked up because there’s no financing,” said Gordon Albrecht, executive vice president of FCI Lender Services Inc., an Anaheim Hills, Calif.-based firm that oversees mortgages for private investors. “This is moving houses.”

Land contracts

The Reeds are using an increasingly popular form of seller financing known as a land contract, also called a contract for deed, in which the buyer takes immediate possession of the house and the seller holds legal title until the debt is paid. Land contracts were used in 319 sales in Michigan in the first quarter, or 2.4 percent of the total, compared with 252 sales, or 1.2 percent, a year earlier, according to Realcomp II Ltd., a Farmington Hills, Mich., multiple-listing service operator. One land contract was recorded in the first quarter of 2005.

Down payments, interest rates and other terms of land contracts are subject to negotiation. There is often a balloon payment in five or 10 years, at which time the buyer must find a way to pay back the seller or risk losing the house and the money already put in.

The Reeds put down $25,000 and make monthly payments of $565, reflecting a 7 percent interest rate amortized over 30 years, with the full balance due in five years. Walters, who lost her job as an automobile engineer in 2008, the same year she inherited the ranch, hopes the Reeds can pay off the loan sooner.

“They’re paying me interest every month, but I’d rather have the money and be done with it,” said Walters, who is using their payments to cover the mortgage on her Battle Creek, Mich., residence. “It does make me nervous.”

The Reeds, who earn a combined $20,000 a year, fell behind on mortgage payments for two homes they had borrowed against after inheriting them from Douglas’ father, and went into bankruptcy in 2007. They later spent $10,000 to make their daughter’s home wheelchair accessible after she was severely injured in a 2009 car crash, Sue Reed said.

They’re hoping for a settlement from a lawsuit stemming from the accident to make the balloon payment to Walters, she said. Their daughter, 33, died last year from her injuries.

“In five years we hope to get everything straightened out enough to have a good credit rating again,” Sue Reed said.

Risky deals

The risks in such deals are significant for both buyer and seller, said Jason Hoffman, a Faribault, Minn., real estate attorney, who calls the participants “hope-ortunists.”

“Each of them is seeking an advantage in an otherwise difficult situation, and they’re hoping everything will work out as envisioned,” Hoffman said. “It’s an act of faith.”

The riskiest gambles involve sellers who — unlike Walters — have bank loans on the properties, Hoffman said.

Most mortgages contain a “due on sale clause,” meaning the lender can call the loan if the home is transferred. While community banks sometimes grant exceptions, many homeowners take their chances, hoping lenders won’t ask questions as long as the payments stream in, he said.

A buyer in this arrangement has little protection if the seller goes into bankruptcy or loses the property to foreclosure, Hoffman said.

The seller’s risk is that the borrower won’t qualify for a bank mortgage when the land contract comes due, he said. And a continuing drop in home prices can imperil the deal for both sides, he said.

Rafik Moore, an investor in Minneapolis who offers seller financing for his properties, said he seeks to help buyers rebuild their credit. He counsels them to start making payments on time and open secured credit-card accounts.

“I hold their hand until they’re able to finance me out,” Moore said. “The problem is this is someone who lost their home, never understood credit to begin with and has always been struggling.”

Not all buyers are broke.

Michael Fazio, broker and owner of American Real Estate Services in Roseville, Mich., said he’s helping one couple with a combined annual income of $100,000. They owe $450,000 on a four-bedroom house in a Detroit suburb that is now valued at $250,000. They plan to walk away from the mortgage if they find a home to buy with a land contract, he said.

Finding a qualified buyer requires careful scrutiny of credit and job histories, especially if the price of the home is too low to extract a significant down payment, he said.

“It’s gut-check time,” Fazio said. “Do you really think these people are good, credible people?”