Who uses land contracts and does one make sense for you? 

By John Murphy, CMB, Vice President, Mortgage Lending

 

Land contracts serve homebuyers who don’t yet qualify for a mortgage. While they may be months or years away from full mortgage approval, this financing option allows them to “try before they buy” the house. It also allows sellers to get “tenants” who will (in theory at least) take better care of the property than if it was a straight rental agreement. A possible “win-win.”

Buyers: Use Caution

Some, but not all, sellers place extra burdens on buyers. Things you need to watch for as a buyer include:

• Large “down payments” that do not apply to the principal balance but are essentially up front fees. This may violate federal law.
• Sub-standard property needing significant repairs.
• The need to build additional structures like garages or pole barns (which belong to the seller not buyer until the contract is paid off).
• Onerous default clauses, often as little as 5 days, which could result in eviction and/or large additional fees.

Switching from Land Contract to Mortgage

Let’s say you’ve been paying on a land contract for two years. Your financial situation has improved and you now qualify for a mortgage. In some cases, sellers agree to apply 100% of all payments to principal because the house was sold at a higher-than-market price under the land contract. However, mortgage lenders do not allow these payments to count as a reduction in amount owed. They only count the amount that is over and above market rate rents in the area for similar properties. This can cause problems if one of two situations arise:

• You don’t have funds to execute the refinance (refi).
• The appraisal does not support the amount owed on the property.

Unfortunately, both scenarios are rather common.

Consumers Can Refi Your Land Contract

If it’s time for you to refi your land contract, Consumers can help. By simultaneously recording the land contract memorandum in conjunction with the warranty deed in the buyer’s name we can provide traditional financing. If you just want cover what is owed on the property, Consumers best rates for traditional refi’s apply. If you want to refi and get cash out, that’ s a non-conforming loan with different pricing. Either way, talk to one of our Mortgage Lending Officers to learn more.