Home Purchase With Land Contract

By Gustan Cho

A home purchase with land contract is when a home buyer purchases a home from a seller and the seller offers the financing instead of a bank or mortgage company.  Most folks who are home buyers normally go through a mortgage lender such as a bank, credit union, mortgage banker, or mortgage broker to secure the mortgage loan.  However, there are situations where the home buyer may be qualified but may not be able to get or qualify for a traditional mortgage loan and a home purchase with land contract may be the best option.

Reasons Why Home Buyers May Not Qualify For Mortgage

There are many reasons why a home buyer may not qualify for a mortgage from a traditional mortgage lender.  A home buyer may be qualified in terms of being able to afford the down payment and monthly mortgage payments but may have issues that traditional mortgage lenders may not be able to get them qualified.  One of the biggest reasons why a home buyer may not qualify for a mortgage loan from a mortgage lender is if the home buyer has a recent bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  There are federal mortgage lending guidelines that require minimum waiting periods after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.  For FHA insured loans, a home buyer needs to wait 2 years after a bankruptcy discharge in order to qualify for a FHA insured mortgage loan.  The waiting period is 3 years after a foreclosure, deed in lieu of foreclosure, and short sale.  Those home buyers who have recovered from a deed in lieu of foreclosure, foreclosure, short sale, and bankruptcy prior to the mandatory waiting period is over cannot qualify for a mortgage loan until they have passed the waiting period, however, can purchase a home from a home seller who is willing to sell their property via land contract.  Land contract real estate transactions, can be a win win situation for both buyers and sellers if it is structured right.

Home Purchase With Land Contract For Buyers With Bad Credit

A home purchase with land contract can provide many benefits for home buyers who have bad credit or low credit scores or even not declaring much income. A home purchase with land contract will give the land contract home buyer some time to fix their credit or time to declare enough income on their tax returns so they can qualify for a traditional mortgage loan. There are other reasons why a home buyer cannot qualify for a mortgage loan from a mortgage lender.  It can be where the home buyer does not have good credit and may need time to get their credit repaired and credit scores higher.  Other reasons might be that the home buyer makes cash income and has no documented income and needs time to have documented income seasoned so he or she can qualify for a mortgage loan.  Other issues may be that the home buyer is in a process of a divorce and most mortgage lenders want divorce final before they will issue a clear to close.  Other issues are when a home buyer does not have the necessary down payment and closing costs required by the mortgage lender in order to get a mortgage loan approval.  By buying a home via land contract, the seller and buyer can negotiate a smaller down payment and take monthly payments for the down payment.

Advantages For Home Seller With Land Contract Home Sales

There are many advantages for a home seller to sell his or her property via land contract during tough real estate markets or when there are many homes in the market.  A home seller who is willing to sell their property via land contract normally can get a higher price.  Land contract home buyers are not normally picky and most of them will not try to nickel and dime you on the asking price.  There are many qualified home buyers who cannot qualify for a traditional mortgage loan from a bank, credit union, or mortgage company because they need time re-establishing their credit or they might need to meet the mandatory waiting period requirements after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

Home sellers that need repairs on their homes where an appraisal cannot meet the minimum condition requirements for someone to qualify for a mortgage can sell their home via land contract and have the home buyer do the work.  The seller and buyer of the land contract purchase will negotiate a purchase price with a set interest rate and a term where the land contract home buyer has to qualify for a traditional mortgage loan and pay the land contract home seller off.

Risks On Land Contract Sales To Home Buyers

Most land contract home sellers do not own their homes free and clear.  They still have a mortgage with a mortgage lender and when you make your land contract monthly housing payment, the land contract home seller deposits your check and in turn makes their mortgage payment to their mortgage company.  In the event if the land contract home seller takes your monthly housing payment and does not make their home mortgage payment, the home can get foreclosed and the land contract home buyer out of luck.  That is why it is strongly recommended that the land contract home buyer protect their interest and it is strongly advised that both parties have real estate attorneys experienced in land contract transactions represent them.

Risk Factors With Land Contract Real Estate Transactions

Real estate values change over time.  Real estate prices do not always go up.  As many of us experienced, nobody knew that real estate values will collapse like it did with the real estate market meltdown of 2008.  With a land contract, there is a date where the land contract home buyer needs to pay off the balance of the land contract note in full.  Most land contract finance agreements are due in 24 to 48 months.  What happens if the housing values collapse when it comes to refinance the land contract balloon note into a regular mortgage loan?  On the positive side to the land contract home buyer, the real estate can also appreciate and appreciate double digits in many cases.  These are considerations that both the land contract seller and buyer needs to discuss and put it in writing.  In the case of a major real estate depreciation, an extension can be requested.

 

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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