A Brief Explanation of Land Contracts

Land contracts were popular a few decades ago before the innovations and new ways of financing homes. As a result of the various forms of financing these days, land contracts are not as popular as they once were. There are, however, many people who still choose this method for financing a home and others who are at least interested in knowing about all their options. Here is a brief explanation about land contracts, their benefits and their disadvantages to help homeowners who are exploring all the options available to them.

The idea behind a land contract is fairly simple. Rather than going through a mortgage lender to finance the property, the buyer and seller work together on an agreement in which the buyer directly pays the seller for the home. The seller of the home keeps the title to the property until the contract is paid off, at which time the title is transferred to the buyer. The buyer then owns the property outright.

Advantages
One reason that many buyers choose to do a land contract is because you do not need good credit to qualify to buy the home. There is not the lengthy process of going through credit checks and qualifying because the seller is making the decision whether or not to enter into the contract with the buyer. Many of these transactions occur between family or friends so the buyer can avoid closing costs and other fees associated with buying a home. In addition, since the buyer and seller are working without a lender, they can avoid the process of appraisals and other things that stand in the way of buying a home.

As an advantage for the seller, there is no need to go through the foreclosure process if the buyer defaults on the payments. Since the seller holds the title to the property, it is easier to retain possession of the property without the lengthy process of going through a foreclosure.

Disadvantages
Although it is easier for the buyer to obtain a land contract, buyers do not have as much protection when they do a land contract with a seller. For instance, buyers who miss only one payment may be considered in default of the contract and be forced to forfeit their property. The money they paid up to that point is considered rent and the seller can keep it. In some states, the buyer may be able to get some money back, but not all of it. The buyer may also find problems with the property after moving in. Unfortunately, under land contracts, they have no protection in terms of repairs or modifications.

In short, land contracts are typically 5-10 year contracts after which time the buyer gets a loan to pay off the remaining balance to obtain the title. Since the buyer has been paying down the purchase price of the home, the mortgage loan is lower by the time the land contract terms are over and they may be in a better position to qualify for a loan to pay the seller the remaining balance. A land contract is a good alternative as long as the written contract offers protections for both the buyer and seller.