Understanding Land Contracts

Anyone who has heard about the subprime mortgage crisis may be understandably leery of dealing with banks. Unfortunately, for those interested in buying real estate, options are limited. Few people have enough available cash to purchase a home or piece of land outright, which would seem to make a mortgage loan a necessity.

Or is it? Many people may not realize there is another option for home buyers to sidestep mortgage woes, known as the land contract.

What Is a Land Contract?

A land contract is effectively a mortgage loan using the home seller as the lender rather than a bank. When you have a land contract with a seller, you are essentially promising to pay for the home in installments. You provide a down payment, and then make monthly payments to the seller while you live on the property.

The payments carry an interest rate and amount previously agreed on in much the same manner as a traditional mortgage. Assuming these, payments are paid regularly and in a timely manner, the ownership of the home reverts to the buyer once paying the total amount stated in the contract.

Why Have a Land Contract Instead of a Traditional Mortgage Loan?

A land contract simply cuts out the middleman from the home buying procedure. If you cannot get a traditional loan because of your credit and are afraid to go the subprime route, the land contract is an option.

If you simply cannot find a lender you like and trust, the land contract is a good alternative. If you are trying to save on costs and fees associated with the lending process, you may consider a land contract as well.

What Else Is There to Know About Land Contracts?

It is a good idea to register the land contract with the appropriate agency. Although this is not necessary and sometimes foregone due to fees involved or other reasons, it really is the best way to protect both buyer and seller from any misunderstandings or disputes down the road.

If you have a land contract, you must be sure to make the correct payments and make them on time. Failure to do so may put your eventual claim on the land in question. If this were to happen, you might forfeit all the money you had invested in the property to date.