Land Contracts: Option To Purchase Home Prior To Waiting Period After Bankruptcy And Foreclosure

By Gustan Cho

July 7, 2014

Land contracts are real estate purchase contracts where the home buyer agrees to purchase the home from the seller without financing from a mortgage lender and the agreement is made between the home buyer and seller.  Land contracts are often referred to as contracts for deed.  Terms of the land contract such as interest rates, terms, deposit, escrows, are made between the home buyer and seller.  Land contracts are normally short term contracts and can offer many benefits for both the home buyer and seller.  The home buyer may not quite qualify for a traditional home loan from a mortgage lender due to not being able to prove income or due to the fact that he or she might have had a recent bankruptcy and/or foreclosure.  There are mandatory waiting periods after a bankrutpcy and/or foreclosure to qualify for a residential mortgage loan.   There is a mandatory two year waiting after the date of the bankruptcy discharge to qualify for a residential mortgage loan.  There is a mandatory three year waiting period after a foreclosure, deed in lieu of foreclosure, or short sale for a home buyer to qualify for a FHA insured mortgage loan.  Waiting periods for conventional loans after a bankruptcy and/or foreclosure is much longer.  There is a four year waiting period after a bankruptcy for a home buyer to qualify for a home loan.  There is a seven year waiting period for a home buyer to qualify for a conventional loan after a regular foreclosure.  A home buyer can qualify to purchase a home via a conventional loan after two years of a deed in lieu of foreclosure and/or short sale if they can put 20% down payment on their home purchase.  The waiting period extends to four years after a deed in lieu of foreclosure and/or short sale if they only have 10% down payment.  For less than 10% down payment, the waiting period after a deed in lieu of foreclosure and/or short sale is seven years.

Advantages Of Land Contracts

The advantages for sellers in offering an installment sale land contract is that they can normally get a higher sales price for their home.  Sellers can just charge interest only until the home buyer can qualify for a residential mortgage loan and get the full amount of the asking price.  Sellers who have homes in dire need of repair can have the land contract home buyer do the repairs.  Homes in dire need of repairs are difficult to get financing so no home buyer with a traditional residential mortgage loan approval will not qualify for the subject property financing.

What Are Real Estate Land Contracts?

Land contracts are often referred as contracts for deed.  Land contracts are security agreements between a home seller and a home buyer.  The seller agrees to sell their home via owner financing to the home buyer.  The seller holds legal title and the home buyer receives equitable title.  The seller can have an existing lien on his or her home or have the property free and clear of any mortgages.  Once the home buyer can secure traditional financing or have the cash to pay the sales agreement of the land contract, the seller then pays off any liens that the seller may have on the property and the balance in equity goes to the home seller.

If Seller Has An Existing Lien Of The Property: All Inclusive Land Contracts Also Known As Wrap Around Land Contracts

If the seller has an existing mortgage from a mortgage lender and offers the home buyer an installment sale land contract, it is also known as wrap around sale land contract.  The home buyer of the land contract makes one payment to the home seller.  The seller accepts full payment and upon receipt of payment, the seller makes the payment to the seller’s mortgage company for the lien of the property and may keep the overage.  If the payment agreement is less the existing mortgage payment to the seller’s mortgage lender, then the seller needs to cough up the difference and pay the mortgage company.

Pros And Cons On Real Estate Purchase Land Contracts

Real estate land contracts can be a win win situation for both home buyers and home sellers if structured the right way and if both parties honor their ends of the bargain.  For home buyers who had just had a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, land contracts gives the home buyer the opportunity to become homeowners again without going through the mandatory two or three year waiting periods mandated by HUD.  For those home buyers who have really bad credit and who cannot qualify for a mortgage loan due to recent late payments, charge offs, tax liens, judgments, or other recent derogatory credit, it gives the opportunity for the home buyer to have some time to re-establish their credit so they can qualify for a residential mortgage loan.  For those who just opened up a business or those self employed individuals who took major writeoffs and cannot qualify for income, it gives them the opportunity to declare income and establish their income and financial profile.  For sellers, offering a real estate purchase land contract will normally give them the opportunity to sell their home for a higher sales price.  If the home has major repairs to be done and does not qualify for residential financing, the new land contract home buyer can do the major repairs until it is financeable.  However, with any other private party sales contracts, there are risks associated for both parties when entering into a real estate purchase land contract.

Structuring Land Contracts

Most land contract home sellers will require a down payment from the real estate land contract buyer.  The larger the down payment, the less risk the sellers have.  Typically, a 5% to 10% down payment is required by most land contract home sellers.  It is strongly recommended that both parties are represented by real estate attorneys so both parties interests are protected.  The  home buyer needs to make sure that there is clean title and no liens attached to the property.  An appraisal is strongly recommended even though the seller will not require it since the seller is not a mortgage lender.  A home inspection should be done as well to make sure that there are no major defects with the subject property.  The attorney should make sure that there are no potential risks involved such as the seller not making their mortgage payments on an existing first lien on the property.  Part or all of the down payment should be escrowed until the home buyer refinances out of the land contract with a traditional residential mortgage loan.  Every state has different laws and regulations governing real estate land contracts.  Make sure when you enter into a real estate purchase land contract that you make all payments with checks so when it comes to refinancing your land contract into a residential mortgage loan by a mortgage lender, the verification of mortgage or verification of payment can be sourced and documented by providing 12 months of cancelled checks.  Paying by checks also includes homeowners insurance payments, utilities, and any other payments associated with your housing expenses.

Retaining Attorneys On Land Contracts

For home sellers, make sure you retain a real estate attorney as well.  Every home buyer has good intent on making their monthly payments but make sure your real estate attorney has an exit strategy in the event if the land contract home buyer defaults in their payments or are no longer interested in purchasing or paying off the land contract.  Depending on the state, foreclosure and eviction laws can be extremely costly and time consuming.  You, as the seller and lender of the land contract, should do your own underwriting by asking them for their credit report, income documentations, and most importantly, make sure they are able to afford the payment agreement and make sure you know their exit strategy.  If structured the right way with the right home buyer, selling your home via land contract can be a win win situation for both parties.

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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