A buyer purchased a home under a land contract in this form of seller-carry lending, the seller
Those who want to buy a home but can’t qualify for a mortgage — or perhaps don’t want one — sometimes find a path to homeownership via a land contract. Land contracts offer a streamlined and often less expensive way to buy or sell a home or land. However, there are enough risks involved that it’s a smart move to explore all of your mortgage options before committing to one. Show
What is a land contract?A land contract is a legal agreement for a seller-financed purchase that doesn’t involve a bank or other mortgage lender. The buyer makes monthly or periodic payments to the property owner until the sale price is paid in full. Those whose credit has been damaged by a short sale or foreclosure may be able to use a land contract to buy another home. It might also be an option for buyers who don’t have enough saved for a down payment and closing costs, or for forward-thinking sellers seeking to spread the gains from the sale out for tax purposes. A land contract goes by a variety of names. It may be called a:
A land contract is not without risk, especially for the buyer, and laws governing land contracts vary by state. With this arrangement, it’s smart for the buyer and seller to each consult a real estate attorney to protect their interests. Land contracts are more common in low-income neighborhoods with higher numbers of non-white residents, where public agencies and nonprofit housing groups use them to help families attain homeownership and to stabilize neighborhoods. If the seller is a nonprofit or public agency, there might be some protections for buyers who miss a payment, but that’s not always the case. Land contracts are also used in the private sector. They surged after the housing crisis, but the exact numbers from that period are hard to pin down because property sales through land contracts often are not officially recorded. Generally, the use of land contracts tends to increase when credit is tight. “Credit is tighter than it was pre-pandemic, and is likely to remain that way until the pandemic is over and there is better visibility and comfort with the number of loan defaults,” says Greg McBride, CFA, Bankrate chief financial analyst. “Borrowers with weak credit histories or that lack a sufficient credit history are the most directly affected, though small business owners and borrowers lacking income documentation have been caught up as well.” How does a land contract work?Because there are no origination fees and high closing or settlement costs, a land contract is a faster, cheaper process than getting a traditional purchase mortgage. Instead of the buyer borrowing money from a lender, the seller finances the purchase of the house. The buyer and seller negotiate a contract that includes details such as the sale price of the house, the interest rate, loan term, down payment and the amount of the monthly or periodic payments. After a few years of installment payments, the buyer often has to make a balloon payment, or a large lump sum payment. In addition, the buyer usually has the responsibility to pay for maintenance, insurance and property taxes. In contrast to a mortgage, the seller has legal title to the property until the final payment for the land contract is made and all conditions of the contract have been met. At that time, the buyer is usually responsible for filing the property deed with the new owner’s name with the appropriate government office. Prior to the final payment and title transfer, however, buyers can protect themselves by filing a “lis pendens,” or notice, with their local office. This serves as evidence of the land contract in the event a seller attempts to enter into contracts with more than one buyer. Land contract vs. mortgage: How are they different?A land contract is a financing agreement with terms that have been negotiated between a buyer and seller. As such, the provisions of a land contract can vary widely based on situation, and aren’t subject to any conforming requirements or other criteria, like mortgages. In contrast, mortgages are structured in standard ways (for example, a hybrid adjustable-rate mortgage or a 30-year term). They also come with a relatively predictable interest rate based on the market. With a land contract, the seller can set the rate at their discretion. What does a land contract look like?The laws governing land contracts vary from state to state, and since buyer and seller negotiate their own terms, each contract can be a little different. Any land contract should lay out all the terms and responsibilities of both parties, however, including:
The National Consumer Law Center also recommends the contract contain requirements for an independent inspection of the property, including an estimated cost of repairs, and a third-party appraisal to verify the fair market value of the property. This is mostly for the buyer’s protection. As the buyer, you should also enlist a title company to perform a title search, and obtain title insurance. Land contract pros and consLand contracts have advantages and disadvantages for both the buyer and the seller. Don’t sign a land contract until you are fully aware of all the risks and have consulted a real estate attorney. Pros for buyers
Pros for sellers
Cons for buyers
Cons for sellers
Land contract tips
Alternatives to land contractsA land contract isn’t the only way for homebuyers who can’t qualify for a mortgage to become homeowners. In fact, for these buyers, it might be better to avoid the risk of a land contract entirely. If you’re a first-time buyer, you might be eligible for a low- or no-down payment loan or other first-time buyer program instead, or assistance and grants to help cover some of the upfront costs of homeownership. You might also decide to hold off on buying a home in order to work on your credit and save for the right moment. Check out Bankrate’s guides to improving your credit score and saving for a down payment. Learn more
What is another name for land contract?Depending upon the legal or common real estate terminology in your area, you may see these types of deals referred to as either land contracts, installment land contracts, contracts for deed, memorandums of contract, real estate contracts or bonds for title.
What does it mean the seller is financing the loan?What Is Seller Financing? Seller financing is a type of real estate agreement that allows the buyer to pay the seller in installments rather than using a traditional mortgage from a bank, credit union or other financial institution.
Is subject to the same as seller financing?The most well known, seller financing real estate option made available to buyers is known colloquially as the “subject to,” meaning the terms of the loan are subject to the seller's existing mortgage.
Is an agreement through which the seller of the land agrees to finance the sale to a new buyer?A land contract is a form of seller financing. It is similar to a mortgage, but rather than borrowing money from a lender or bank to buy real estate, the buyer makes payments to the real estate owner, or seller, until the purchase price is paid in full.
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