Pros and Cons of a Land Contract

by: housingsupport

There are several ways in which prospective homeowners can purchase a home. These include mortgages, commercial loans, land contracts, long-term lease and exchange. One of the popular options of buying a home is through land contract. A land contract is an agreement by the seller to sell the home to the buyer at an agreed price. The seller retains the ownership of the home until the buyer makes all the installment payments plus interest after which the home ownership is transferred to the buyer. This is in contrast to mortgages where the home buyer borrows money from the bank, buys the home and assumes full ownership of the property as he repays the loan to the bank.

There are benefits of buying homes using a land contract. Land contracts are useful when the home buyer cannot afford the capital required for down payment for the mortgage and the closing costs. Banks normally require the potential homeowner to raise a percentage of the mortgage as a down payment before giving out the loan. Land contracts also come in handy when the home buyer is not able to qualify for a mortgage from the bank. This can be due to a poor credit score, previous loan defaults or low earnings. These home buyers may find a seller who is willing to give them a second chance.

When it comes to financing, land contracts can save the potential homebuyer various costs. These include loan origination fee, appraisal fees, surveying fees, mortgage points and other legal costs incurred when taking a mortgage. Monthly installment payments of other financing options such as commercial loans and mortgages can vary depending on inflation and interest rates. In a land contract, the installments payments are normally fixed hence more predictable and cheaper to the home buyer. Land contracts are also useful when the seller wants to sell the home urgently and there is no time to organize for a mortgage and other conventional financing options. Although initially it is used by people with a low credit score, paying of installments in land contracts can improve one’s credit rating making the buyer eligible for future financing options by the bank.

However, buying homes using a land contract has a number of disadvantages. One of the downsides for a land contract is that the buyer risks being evicted from the home if he misses a monthly installment. Most land contracts stipulate that the seller reserves the right to evict the buyer if he misses installment before paying 20% of the purchase price or payments less than five years. When this happens, the buyer loses all the installments made, the down payments and the real estate taxes paid.

The seller of the home can also decide to charge the buyer a higher purchasing price of the home and higher interest rates because they know that the buyer cannot access a mortgage. Most of the home contracts are also for short term. The buyer is supposed to borrow and make a balloon payment at the end of the contract. This poses a risk to the buyer losing the home plus payments made if he is not able to secure a mortgage loan at the end of the contract.

The property may be under legal claims or liabilities. The seller might himself have an outstanding mortgage on the property and the buyer can lose his investment in case of default. Land contracts can also be a challenge if the seller dies before the end of the contract. The land contracts also have many grey areas such as making modifications to the home, payments for taxes, insurance and home repairs.
Taxes are normally paid at the end of the land contract. This is after the buyer has made all the installments and assumed ownership of the home.

The homeowner normally enjoys tax breaks if he is selling his primary residence. However, other residences are classified as investment properties and attract higher taxes after sale. A land contract is normally useful when potential home buyers are unable to secure a mortgage loan to purchase a home. If used exclusively, it disadvantages the buyer in hat he can only own the home after finishing the payments. However, it becomes beneficial to the buyer when used with other traditional financing mechanisms such as mortgages. The buyer buys the home using a land contract for a short time after which he takes a mortgage loan when he is eligible and pays off the seller.

Are You Unemployed?

Know your benefits and get qualified on your unemployment check.

Other Featured Article

Pros and Cons of a Land Contract

There are several ways in which prospective homeowners can purchase a home. These include mortgages, commercial loans, land contracts, long-term lease and...

Homeowners Insurance

If your another homeowner or have never looked for home insurance yet need to locate the most ideal rates for home insurance, you have gone to the opportune spot.

Vital information about Foreclosure

The fact of the matter is that if you fail to make payments in time, then foreclosure is inevitable. However, with the right understanding, it is possible to prevent this from happening..

© 2020 housingsupport. All Rights Reserved