Land Sale Contract or Land Contract
If you’ve run into this term before, you either know what it is or you’re really curious. Why? Because it’s usually said next to the word ‘mortgage’ or ‘deed of trust’ and juxtaposed as an alternative to those things. This is because that’s exactly what a land sale contract is; an alternative to a mortgage or deed of trust. However, before you get too excited, land sale contracts are usually not awesome; the best time to use a land sale contract is when you cannot qualify for a mortgage or deed of trust. We’ll speak candidly about land sale contracts in this article to give you a good understanding of the advantages and disadvantages of them.
The Biggest Difference
The biggest difference (and the root of all the other differences) is that where a mortgage or deed of trust is an instrument to borrow money from a bank or lender, a land sale contract is an instrument to borrow money directly from the seller of the home. So if you purchase a home with a land sale contract, you will be making your payments directly to the seller, rather than to a bank or lender. As mentioned, this difference is the root of most (if not all) of the other differences between a land sale contract and a mortgage/deed of trust.
The Other Differences
Because you will be making arrangements directly with the seller of the home, there is a lot less regulation on what the terms of the land contract can be. Agreements between two individuals can be whatever the two agreed on. When you are considering a land sale contract, remember that the seller can ask whatever interest rate he or she wants, and it’s up to you to take it or leave it. Also, when you purchase with a land contract, you immediately receive what is called an ‘equitable title’ and the seller retains the legal title until the home is completely paid off. This makes for some interesting differences in the way ownership is treated while payments are still being made, and if payments stop prematurely.
The Benefits of a Land Sale Contract
The biggest benefit of a land sale contract to you as the borrower is that it might enable you to get a house when you otherwise couldn’t. If you’re a veteran and eligible for VA loans, you should definitely apply for a loan here at Low VA Rates before you pursue a land sale contract, because our credit requirements are much more flexible and human than other lenders. Land sale contracts, however, can be a way for you to purchase a home even if your credit does not permit you to obtain a mortgage or deed of trust. Much like a mortgage or a deed of trust, when you use a land sale contract you have assurance that the seller can’t just kick you out and sell the home willy-nilly. The seller cannot sell the home unless you default on your payments.
The Costs of a Land Sale Contract
Land sale contracts can be tough pills to swallow. The seller can set whatever interest rate they want, and since you’re likely pursuing a land sale contract because you can’t qualify for a traditional financing option, the interest rate will probably be much, much higher than it would be otherwise. Additionally, the seller can require as high of a down payment as they want, and it’s up to you to take it or leave it. Most sellers won’t require as high of a down payment as banks and lenders, since the lack of cash-on-hand is one of the most common reasons a borrower can’t qualify for a mortgage/deed of trust, but some will.
That’s not all. Where a lender or bank has to go through a process before foreclosing on your home, the hoops a seller has to jump through vary by contract. If you default on your payments, and the seller decides to have you leave the home, you forfeit all the money you’ve paid the seller up to this point, and the seller keeps the money and the home, including any revenue from selling it. You’ll want to have a real estate attorney look over the contract with you and make sure that you have a reasonable amount of time in case of default to correct the situation before the seller can kick you out.
So, a mortgage/deed of trust is almost always preferable to a land sale contract, but a land sale contract can be preferable to not buying a house.