Sep 30, 2011
Buying a Land Contract Home
If you can't qualify for a bank mortgage, here's another option
The Detroit area has tons of would-be homeowners who are not eligible for a mortgage because of a previous foreclosure or short sale. I talk to so many people who feel they have been relegated to the renter-for-life category.
I am writing this blog post just for those people who want to own, but feel hopelessly locked out of homeownership.
A land contract is an alternative financing method. It allows people who are not mortgage ready to purchase a home from a seller. The seller acts as the bank and sells the home in exchange for a down payment and monthly payments that include interest. The seller, referred to as the Land Contract Owner, becomes the buyer's lender. Therefore, the buyer, referred to as a Land Contract Tenant, pays the seller a Land Contract Payment, which is the same thing as a mortgage payment. It includes a principal payment, interest and may also include homeowners insurance and property taxes.
There are benefits and disadvantages to entering into a land contract. You must decide if the benefits outweigh the disadvantages.
The benefits are:
- You own the house or condo.
- The interest and the improvements are tax deductible.
- You have more rights than a tenant.
The disadvantages are:
In general, the interest rates are higher than bank rates.
Prices are usually non-negotiable and could be higher than average.
Down payments are usually 20 percent of the sales price.
If you decide that a land contract is the best option for you, please remember these tips:
- Get title work that insures you against fraud and title defects. Title insurance will also confirm the owners' of the property you are buying.
- Record your land contract and insist that the deed be held in escrow by the title agent or attorney. This ensures your rights as the property owner.
- Check and verify if the property has an open mortgage. Most mortgages have a due on sale clause. This means that the property owner must payoff his or her mortgage before selling the house on land contract. Ask for a mortgage waiver letter authorizing the property owner to sell if there is an open mortgage.
- Understand the terms of the land contract. Most owners will want the land contract paid off within a certain number of years. This means you must work to cure any issues with your credit so that you can qualify for a mortgage at some point in the future.
- GET HELP from a qualified real estate agent, broker or real estate attorney.
Finally, if you purchase with a land contract term, please regularly check the following:
The property taxes should be paid and not delinquent. If the seller has an open mortgage, periodically verify the mortgage payments are current.
Please contact me with any questions about land contracts or any other real estate matters!