Virginia home sellers and buyers using a popular real estate financing technique to avoid high interest rates could face foreclosure by mortgage lenders if a Prince William County circuit court decision handed down this week is sustained by higher courts.

In the first ruling of its type in the state, Prince William Circuit Judge Percy Thornton Jr. held that "land contract" agreements between home sellers and buyers may violate the terms contained in most standard mortgage documents.

Land contracts, also known as contracts-for-deed, are installment sales transactions in which title to the property doesn't change hands immediately between buyer and seller. The buyer occupies the home, takes over the payments on the seller's mortgage and agrees to pay the seller the difference between the sales price and the mortgage balance in installments over a period time.

The buyer receives formal legal title to the property at a mutually acceptable time specified in the contract.

Realty brokers and attorneys have promoted the land-contract technique extensively throughout the Washington area in the past nine months as a method of avoiding new, high-interest-rate mortgage costs.

Since legal title does not change hands immediately through such contracts, they have argued, the standard clause prohibiting assumptions of mortgages without lenders' consent is not violated.

The non-assumption or "due-on-sale" clause, included in virtually all non-government-insured deeds of trust and mortgages written since the early 1970s, allows an S&L or bank to demand full payment of a mortgage if the borrower transfers his or her interest in it to anyone else.

Lenders consider this clause vital to protect them against assumptions of existing loans by unqualified borrowers and to enable them to close out unprofitable mortgages carrying low interest rates made in earlier years.

No precise estimates are available on the number of homes financed with land contracts in the D.C. area in recent months, but legal experts say the total is in the hundreds of units, involving millions of dollars of residential real estate.

The Prince William County case, which appears likely to trigger a legal battle between lenders and realty brokers, involves a town house in the Irongate subdivision of Manassas. Its owners, Albert and Judith Lipps, sold the house last April for $36,500 using a land contract.

The purchaser, a rental home investment firm known as Sandmar Associates Inc., took over payments of the Lipp's two-year-old, 9 1/2 percent deed of trust from First American Savings and Loan Association of Manassas.

First American learned of the land contract assumption when Sandmar Associates' name appeared on property insurance documents, according to the S&L executive vice president, James Harrison. First American began foreclosure proceedings in December, invoking its due-on-sale rights. The Lippes and Sandmar Associates obtained a temporary injunction until late February, when the case went to court.

The Lipps' real estate agent, Judie Hoover, of Sentry Realty Inc. of Manassas, said her firm is collecting funds from other brokers in the D.C. area to finance an appeal of the ruling "all the way to the Virginia Supreme Court."

"If home buyers and sellers can't use land contracts with rates at S&Ls the way they are today," she said, "what are we all supposed to do?Pay 16 percent?"