What Should You Know About Purchasing On A Land Contract?

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If you're interested in purchasing a home, but your credit isn't quite up to par for a traditional mortgage, you may be considering a land contract or rent-to-own arrangement as a viable alternative. These arrangements can provide many benefits to both buyer and seller -- however, because they can be more complex than traditional mortgages, you may want to seek legal advice from professionals like Heil & Saylor before embarking on this transaction. Read on to learn more about land contracts and what you should know before signing one.

What is a land contract? 

A land contract differs substantially from a traditional mortgage, but still allows you to obtain full ownership of your home after spending a specified period of time making regular monthly payments. 

Unlike a traditional mortgage, in which you purchase the home from a seller using funds from a third party bank, a land contract involves only two parties -- the buyer and seller. When you sign the contract, the seller will agree to finance the property on your behalf -- and instead of paying a bank, each month you'll pay the seller the agreed-upon price. After you've made all payments required under the contract, the seller will give you the deed to the home.

When can you seek a land contract?

In general, land contracts are used for home purchases when either the borrower or the home itself does not qualify for a traditional mortgage. For example, in some areas it can be difficult to take out a mortgage for a mobile home, or for raw land that is not zoned for residential or commercial use. In these situations, the seller may be willing to carry financing on the home in exchange for regular monthly payments.

Many buyers also seek a land contract if they're currently renting a home and the owner indicates his or her wish to sell. By agreeing to a land contract, the owner can continue to receive regular monthly payments without going through the hassle of transferring ownership of the property.

What should you keep in mind during a land contract transaction? 

Land contracts can be riskier for the buyer than a traditional mortgage. If the property is subject to an underlying mortgage in the seller's name, you have few legal protections if the seller fails to pay the mortgage payment (even if you're making timely contract payments yourself). 

These contracts can also present problems if you're having trouble making payments yourself. Rather than having the seller go through the foreclosure process and its related consumer protections, you'll instead be subject to an eviction -- with a much shorter timeline and fewer opportunities to repay any deficiency and reinstate your mortgage.

Before signing a land contract, be sure to have an attorney look over the agreement to ensure that you're adequately protected in case things go awry.