What is a Land Contract and How Can it Help You Buy a Home?

what is a land contract

Hoping to buy a home, but not sure if you’ll qualify for a traditional mortgage? A land contract might be the answer you need.

What is a land contract? It’s not the most commonly used form of financing a home, but it is an option. Countless buyers find new opportunities through land contracts. If you don’t meet the requirements for a mortgage – maybe you’re self-employed or don’t have good credit – you may still be able to buy a home, after all.

In this guide, we’ll break down everything you need to know about land contracts so you can make the best decision for your future. Keep reading to learn more about this opportunity!

What is a Land Contract?

A land contract is a written legal agreement or contract that is used to buy real estate, including land, a house, an apartment building, or any other property. This is a type of seller financing, as is rent to own, which you can learn more about here.

Land contracts are kind of like mortgages. However, instead of borrowing the funds from a traditional lender or a bank, buyers pay the owner or seller of the real estate in increments until the full price is met.

The seller and buyer must both sign the contract, which covers the conditions and terms of the sale that they’ve both agreed to. When all those conditions and terms have been met, and the purchase price has been paid in full, the property’s title officially transfers from seller to buyer. A deed, such as a warranty deed, conveys the title over.

Why Use a Land Contract?

Many types of seller financing have advantages for both the seller and buyer, and land contracts are no exception.

For buyers, the main benefit is that these contracts let them circumvent the traditional mortgage requirements. If they don’t have the right credit history or other requirements to qualify for a mortgage, a land contract might be their only option. With a land contract, the buyer and seller to agree to any terms that work best.

The seller won’t be getting the home’s full purchase price right away. However, this can give the seller more options for choosing potential buyers, since they don’t need to wait for people to qualify for a mortgage. Sellers may also be able to get higher purchase prices for their homes when they sell using a land contract.

Sellers can still ask for and get large sums of cash in the form of a down payment with these contracts, too.

When Does the Ownership Transfer?

While the buyer is in the process of making regular payments to the seller, the buyer has what’s known as an “equitable title” for the property. The buyer is an equitable title holder, which means they have an interest in the property. The seller can’t sell to a third party or subject the property to anything that would interfere with the buyer’s interest.

The seller, however, keeps the property’s legal title until the buyer has made the last payment. After that payment’s been made, and every condition of the contract is met, the property’s deed can be filed with the right government office. Then, the buyer is officially named as the property’s new owner.

What Happens if Payments Get Missed?

If a buyer defaults on their land contract, or doesn’t successfully make the monthly payments according to the contract, the seller might file a court action called land contract forfeiture. In a forfeiture, the buyer forfeits or gives up all the money they paid to the seller so far.

The buyer’s equitable title also gets put out in the event of a forfeiture. This means that if the buyer can’t pay, the seller keeps all the money that’s been paid so far, plus the real estate in question.

For sellers, using a land contract does involve a bit of risk. The seller doesn’t get the property’s whole purchase price when they sell. However, forfeiture keeps the seller safe from buyers who won’t pay, while the seller gets to keep the down payment and any other payments.

This also frees up the seller to sell the property to someone else after a forfeiture, making the land contract system an advantage in the long run.

Land Contract Pros and Cons

Wondering if a land contract is right for you? Let’s take a look at some of the pros and cons that can help you decide.

Pro: Easy Financing

For buyers, the land contract offers an easier method of financing than the traditional mortgage. This gives the buyer more time to work on rebuilding credit or fixing other financial issues, without needing to wait to buy property. This can also be a good way to invest in property while working to become eligible for a traditional loan.

Con: Sellers’ Win-Win Position

In some ways, the land contract is a win-win for sellers – which might be a con for some buyers. The seller owns the property until the buyer makes the right amount of payments, and forfeitures definitely weigh on the side of the seller.

Pro: Sales Tool

For many sellers, the land contract is a great sales tool that will appeal to more buyers. When there aren’t many buyers on the market, sellers can use this to their advantage.

Con: Possible Contract Mistakes

As with any contract situation, there is the possibility of making mistakes. The contract has to cover all kinds of issues and unforeseen events. If something happens that’s not outlined in the contract, such as a dramatic change in the home’s market value, things can get complicated.

Is a Land Contract Right for You?

As long as you approach it with care and make sure the contract is written well, a land contract can be a great choice for both buyer and seller. Now that you know how to answer “What is a land contract?” you can make an informed decision for your needs.

Want to learn more about taking care of your new home? Then don’t miss this post.

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