Land contracts are great.
Especially for folks in unique scenarios who don’t meet traditional lending guidelines, buying a house on land contract can often be a great alternative to renting.
The problem is that most land contracts have a requirement that the home is refinanced within 3 to 5 years.
Let’s take a step back for a second though.
What is a land contract?
A land contract (or contract for deed) is a private loan between the buyer and seller. The seller acts as the mortgage lender. So instead of the buyer going to ABC Mortgage Company, they get private financing from the seller. In which case the seller funds the transaction and accepts payments from the buyer for the duration of the loan.
Borrowers seek homes for sale on land contract because they know they have unique circumstances.
Here are some reasons someone might seek to buy a home on land contract:
- Recent bankruptcy, foreclosure, or short-sale
- Self-employed borrowers who don’t show adequate income on tax returns
- Foreign nationals who don’t have credit established in the US
- Recent divorce that ruined their credit
- The property they are buying may be unique, and might not have any acceptable comparables
Circling back to the borrower’s predicament…
As I mentioned, many (most) land contracts have a requirement that the borrower is to obtain traditional financing within 3-5 years. What often happens is that borrowers still find themselves in a position where traditional financing might not be an option yet. Maybe their credit still isn’t cleaned up, or maybe their income circumstances are still unique.
In this case what do you do?
Well, you either sell the home, and seek a new home under land contract. Or you find a lender who offers portfolio loans. Portfolio loans are designed to get borrowers approved for home ownership who don’t quite meet traditional lending guidelines. They are mortgages that are funded in house but the credit union or bank, and are kept on their “portfolio”. Portfolio loans provide a common sense approach to the mortgage lending process.
Portfolio loans are a great alternative to buying on land contract. Especially a great option to consider when it’s time to refinance a land contract.
Another problem with land contracts that is often overlooked is the fact that land contract payments are not reported to the credit bureaus. Imagine you’ve been paying your mortgage payment on time for the last 3 years, but those payments are not reflected on your credit report?! Wasn’t the whole point of getting into a land contract to get back on your feet and prove to the world that you are a credible homeowner?
Not having the land contract payments reported to the credit bureaus presents a two-fold problem:
- You don’t get any pat on the back for on time payments.
- You don’t get any boost in credit score for having a housing payment history at all.
Having a housing payment history is paramount when talking about getting a traditional mortgage.
Is it possible to get approved for a traditional mortgage without having a housing payment history on your credit report? Sure it is. But having a housing payment history on your credit report is certainly a strong compensating factor when applying for a new mortgage. With a land contract, it’s pretty much non-existent.
The good news is that your lender will probably ask you to provide proof of 12 month’s payments on the land contract. They will be looking for consistency and prompt payment history. If you had any payments that were more than 30 days late, it’s a big red flag. If you are unable to provide 12 month’s checks of land contract payments or at least 12 month’s bank statements showing the land contract payments being withdrawn from your account, it could be a major problem.
4 Steps to a Successful Land Contract Refinance:
- Make sure the land contract gets legally recorded. It’s not expensive, and it’s pretty easy. If the title company didn’t have the land contract recorded with the county when you bought the home, it’s not the end of the world. Call the county recorder’s office, or register of deeds office. Tell them you need to get your land contract recorded, and they will point you in the right direction. In order for a lender to perform a refinance of that land contract, there needs to be proof it was recorded (preferably when the land contract was originally executed).
- Make your payments on time. I can’t stress enough how important it is to not have any late payments on your land contract in the most recent 12 months if you’re looking to refinance. Having even one late payment can result in denial, or a requirement to have more equity in the house in order to make an exception for refinance approval.
- Keep records of everything. Do NOT make your land contract payments in cash. Pay by check or auto withdrawal to the land contract holder. If you pay your land contract payments in cash, you might as well pay with happy thoughts and smiles. It’s extremely difficult to track the exchange of cash, and of course having the ability to track and verify everything on a refinance is key.
- Work with a lender who offers portfolio loans. Even if you think you might be eligible for traditional financing when its time to refinance your land contract, working with a portfolio lender will only set you up for success. Reason being is that there are so many moving parts in a mortgage approval. If something is discovered half way through the refinance process that makes your loan deniable on traditional financing, then you have a chance to get it approval on a portfolio loan. It’s a plan B, plain and simple. Heaven forbid something goes wrong, you don’t want to have to start from scratch with a new lender who offers portfolio lending, and have to pay for an appraisal all over again. You might as well start with a lender who offers traditional lending (conventional/FHA/USDA/VA) as well as portfolio loans.
If you are looking to refinance your land contract.
I invite you to reach out to me.
You won’t be connected with a robot, or some intern. You’ll be connected with me directly. If I am unable to assist, I can probably point you in the right direction. At the very least you’ll walk away with a plan on what to do to set yourself up for success.
Adam Lesner | Mortgage Loan Officer | NMLS 198818
Mackinac Savings Bank NMLS 401686 | Main offices in Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona, California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Ohio, Oregon, Tennessee, Virginia, Wisconsin.