Buying on a land contract instead of a mortgage
Unable to qualify for a traditional mortgage due to a foreclosure? Bankruptcy or low credit score? A land contract may give you the option to purchase a home after foreclosure.
August 3, 2015 - Author: William V. Hendrian, Michigan State University Extension
Unable to qualify for a mortgage? If you have suffered through a foreclosure, bankruptcy or other money crisis you may be struggling to qualify for a loan. With time and a plan you may be able to build up your credit again, but what if you do not have time? What if you are unable to find an adequate rental home? One alternative may be to purchase a home using a land contract. However, you should know that a land contract is a legal document governed by general contract law with certain statutory requirements, e.g. to be in writing. As is the case with any legal transaction, you are encouraged to seek legal advice from a competent attorney before proceeding with a land contract.
Nevertheless, a land contract can be a legitimate alternative to conventional financing. The seller, often called the land contract vendor agrees with the buyer, the land contract vendee, to sell the home according to mutually agreed terms and conditions. The parties to a typical land contract usually agree on a purchase price, down payment, monthly payments including interest and a balloon payment of the balance due with interest (total amount due all “ballooned up” and due by a deadline) sometimes only a few years into the contract. The hope is that the purchaser will be able to receive conventional financing by the time the balloon payment is due. Although the actual title to the home does not transfer to the purchaser until the debt is paid off, equitable title or the purchaser’s right to obtain actual title along with typical landowner rights does pass with the execution of the contract.
There are risks and advantages to both the seller and the purchaser. The seller has the advantage of reclaiming possession of the home if the purchaser fails to perform or defaults on the deal. In addition, the seller earns interest, and since equitable title has passed to the purchaser, the seller is not responsible for repairs and maintenance normally inherent with being a landlord.
The purchaser has the responsibility of maintaining the home and has the risk of losing all of her payments made in the event of default and forfeiture of the land contract. However, since the financing is being done by the seller, the purchaser may be able to qualify even with bad credit as long as she has enough for the down payment.
All of these details must be in writing, and there are potential scams to avoid. Again, seek competent legal counsel before proceeding with a land contract. While in the lawyer’s office, you may want to inquire about a lease with the option to purchase the property. This is an alternative to a land contract that may fit your circumstances even better. The Michigan Foreclosure Taskforce has put together a good summary of land contracts as well.
Michigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.
Although very helpful, nothing in the post-foreclosure toolkit should be construed as legal advice. You can learn more about land contracts and get more help making financial decisions after suffering a foreclosure or learn about available classes by visiting Michigan State University Extension.