Home buyers won’t always be able to simply pick out a house and purchase it without issues. In fact, it’s common for problems to come up when buying a new property, especially when it comes to financing.
Most people aren’t able to push through with a house purchase because they fail to get approved for a mortgage because of their credit score. This plays a big role in buying a house.
Fortunately, there’s a friendly alternative for people who fail to get mortgages. It is called a land contract.
What Does a Land Contract Mean?
A land contract is defined as a contract for the sale of land or real estate property. It is a form of owner financing, which is when a loan is provided to the buyer by the seller of the property.
Land contracts are also known as contracts for deed or installment sale contracts.
With this type of contract, the buyer purchases the property by making their payments to the seller for a certain time or specific terms.
Usually, when both parties (the buyer and the seller) agree to a land contract, this means that the buyer will have possession of the home along with the title to the property.
However, the seller with retain the legal title to the purchased property until the buyer is able to pay off the loan.
If the buyer fails to meet these conditions that each party has agreed on, the contract becomes void, and their right to the property and their payments will be forfeited.
This gives the seller the ability to take back the legal possession of the land through a forfeiture process.
How Does a Land Contract Work?
Working with a land contract undergoes a different process from the traditional home-buying process.
Buyers would approach a seller to let them know they would like to purchase the land contract for the real estate they are interested in, which is similar to how a typical home purchase starts.
But there are some parts of the process that differ from the usual. Listed below is an overview of how purchasing with a land contract works:
Find your chosen home.
As the buyer, you will first need to locate which home you would want to purchase. You can do this through real-estate agents or listings online. Some services also offer to provide you with results for land contract homes.
Negotiate with the seller regarding the land-purchase agreement terms.
You and the seller will come to a mutual agreement with the terms regarding the land contract. This includes the purchase price, loan term, installment amount, and others.
Arrange the property for inspection.
A part of the home-buying process is to put the property up for inspection. You may also choose to have the property appraised as well. This will help you determine whether you are purchasing the home for a fair price or not.
Sign the land contract.
When finalizations are made to the agreement, both you and the seller would have to sign the contract. This would also be the time you make your down payment if any.
The land contract states that the legal title to the property will be moved over to you once you have paid off the loan. Once the deed is signed, you will have the equitable title over the property.
Move in or use the property.
You have full possession of the property after signing the contract. This enables you to move in or use the property however you intend to.
Record the land contract.
In some states, you will need to register your contract for deed agreement in the county the property was purchased.
Make your installment payments as agreed.
You can make your payments to the seller according to what you have agreed on, whether it’s directly to them or through a servicing company.
Take note that if you don’t make your payment and fail to comply with the terms you have agreed on, your rights to the property will be forfeited. The seller will be able to start the forfeiture process.
Pay off the home loan.
Make your payments as agreed until the property loan is paid off. When this is done, you will receive the full title to the property.
Who Holds the Land Contract Title?
Initially, the seller will hold the legal title to the property until the provided home loan has been paid off by the buyer.
However, this doesn’t mean the buyer doesn’t get any benefit with the purchase until it gets fully paid.
The buyer gains possession of the property and the rights to the title of the property. They will be able to use the land or home however they would like as long as they continue to comply with the terms they have agreed to with the seller.
In the event that they fail to meet the conditions, their rights over the property and the payments they have made will be forfeited and lead to a forfeiture process, which the seller can initiate.
On the other hand, if they are able to pay off the loan without going against any of the terms, the seller will hand over the property’s legal title to the buyer.
This means the buyer would then have the full legal title of the property under their possession.
What Are the Land Contract Pros and Cons?
A land contract has its benefits. However, there are cons that come with it as well.
Before choosing to opt for a land contract when purchasing a property, it’s important to make sure you know the good and the bad. This way, you can know if it’s right for you.
Land Contract Pros
Get financing easily
It would be easier for you to get home financing done with a land contract rather than when you purchase the property through traditional means.
This doesn’t require you to get a mortgage, which allows you to purchase a home as you continue to build your credit.
Not much harm to sellers
If you’re on the seller side, a land contract won’t leave you in disarray if a buyer defaults.
When the transaction is complete and the buyer pays off the property in full, you get to make a successful sale. If not, you get back the title and possession to the property through the forfeiture process.
More opportunity to purchase
There are instances where buyers fail to get ahold of a property because they don’t qualify for the home under traditional home loan guidelines.
With a land contract, the buyer can go through seller financing and later pay off the contract through a mortgage if the total balance becomes smaller.
Negotiations welcome
A part of making agreements with land contract homes is that you can negotiate certain aspects such as the down payment and installment payments. This may also include the length of the loan term.
Less restrictive
Compared to traditional mortgages, land contracts allow you to make your payments through installments without having to opt for a loan yourself.
You can negotiate with the seller how much time you would need to pay off the loan and how much ability you have to pay within your agreed periods of time.
Land Contract Cons
Buyer is dependent on seller
You’re going to have to put a lot of faith in the seller. If the property is under a mortgage the seller is paying off, you could easily lose the if once the seller fails to make the needed payments.
Interest rates could be higher
There is a higher risk with a land contract since most people opt for this when purchasing homes because they fail to get a mortgage. As a result, sellers would make their interest rates higher than those of a traditional mortgage.
Gray area in homeownership
Issues could arise because of the ownership with the property. You may have the equitable title to the home, but the seller still has the legal title. If any legal disputes are to be filed, this could cause problems.
How Do You Write a Land Contract Agreement?
In writing a land contract agreement, you generally need to include the following:
- Information on the seller
- Information on the buyer
- Information on the property being sold / purchased
- Information on the price of the property
- Information on the agreed payment plan
To add more detail, you should include the needed amounts, dates, and information regarding the following:
- Property insurance
- Property tax
- Loan interest calculation
- Late payment penalties
- Default protocols
Does a Land Contract Have to Be Recorded?
Some states don’t require land contracts to be recorded. In these areas, the agreement simply needs to be written with specific details on the purchase along with proof that both parties had agreed to the given guidelines that are written in the agreement.
However, some places may require you to record it. If this is the case, you would need to look through the rules and regulations regarding the recording of land contracts.
There are certain places that require you to get this done within a certain time, ranging from days to months.
If this isn’t completed during the given time frame, penalties will be made, especially when the contract still binds both parties that signed it.
Is a Land Contract a Good Idea?
Generally, a land contract would be the best option for someone who fails to get a mortgage but would want to move out of their property since you can pay for the home in installments without having to get a loan for yourself.
However, this is if the buyer doesn’t mind the risks that may come with it. This may include whether the property is fully paid or currently under a mortgage and other possible factors that can increase their assurance.
Although, the buyer can steer clear of risks by gathering as much detail on the property as possible.
Even when you trust the seller, it’s important to make sure you get enough details on the property. This would also help you if a dispute comes up.
Whether a land contract may be a better purchasing option for you or not depends on your ability to purchase the property and how you want to do so.
Typical mortgages will provide you more security and protection with the purchase. But if you’re comfortable with opting for a land contract, or if you have trouble with your credit despite being able to afford the property, this would be a good alternate choice.