Mortgage and Portfolio Loan Guide

E018: How to Buy a House on Land Contract

E018: How to Buy a House on Land Contract

 
 
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When you decide buying a house on land contract is the route you want to take, here is a video on how to find homes for sale on land contract, and how to prepare to buy.

Other videos and helpful links… Everything you need to know about buying on land contract
Video – https://youtu.be/Wx4HWqndK7w
Blog – https://www.balanceprocess.com/buying-a-home-on-land-contra…/

Alternative to land contract – Portfolio Loan
https://www.balanceprocess.com/what-is-a-portfolio-loan/

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E003: Buying a Home on Land Contract

E003: Buying a Home on Land Contract

 
 
00:00 / 10:11
 
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Buying a home with seller financing on a land contract is not for everyone. In this episode I cover what you need to know about buying a house on land contract, and how to successfully refinance out of it when it’s time.

You can also learn more at https://www.balanceprocess.com/what-is-a-land-contract/

Buying a House on Land Contract

Buying a house on land contract (or seller financing) is a great option to go with if you don’t meet normal lending guidelines for traditional financing. It allows you to take ownership of a home without having to deal with banks (temporarily).

Also called “contract for deed” buying a home on land contract has many pros and cons. Below we dive into 7 major things to keep in mind when buying a home on land contract.

By reading this, and considering these factors, you’ll be able to determine if going this direction with your home purchase is the right fit for you and your family.

Buying a House on Land Contract Eveything You Need to Know

 

7 Things You Must Know When Buying a House on Land Contract

land contract house

Condition of the Property

Many times, a seller is willing to sell on land contract because they know the home is in disrepair. The house may also unique characteristics that won’t pass traditional lending standards.

Selling on land contract is an attractive route because the seller acts as the lender. Since the seller is the “lender” bank guidelines don’t matter at the time.

The issue is that most land contracts have a balloon payment on them. This means there is an expiration date on the contract that says the buyer needs to pay it in full within a certain number of years (usually 5 years or less).  At the time when the balloon payment is due, the buyer (you) will need to pay the remaining balance of the land contract. You would do that by either refinancing the home, or selling the home. Now you’re back at square one having to deal with any property condition issues that a lender may see as a problem.

It is in your best interest to get an inspection prior to purchasing the home. You want to know full well what you’re getting yourself into. This way, you can address any property issues as soon as possible, and be ready to refinance.

Paper Trail of Payments land contract payments

Since a land contract is usually a temporary solution, it’s extremely important to keep a paper trail of everything. Most importantly, copies of checks of land contract payments.

When it is time to refinance out of the land contract, it is going to be important to show your lender evidence of land contract payments made (on time). Typically, you’ll need to show at least 12 months most recent payments. You might as well keep the paper trail from day one to establish good habits and set yourself up for success for when it’s time to refinance out of the land contract.

Do not make your land contract payments in cash. Make it easy for the payments to be verifiable. The reason it’s so important to show verifiable payment history is because a seller financed loan is not reported on your credit report. This makes being able to show evidence of on time land contract payments crucial.

Terms of Contract

Buying a home on land contract allows for a certain amount of flexibility on terms, rate, and length of contract.

Anything is negotiable. But really, the seller is mostly in control because they are acting as the lender. Typical terms on a land contract are 15-30 year amortization with a 5 year balloon. This means the payment made every month is applied toward principal and interest. At the beginning, a large portion of the payment is applied toward interest, and very little goes toward the principal. As the months go by, more goes toward principal, and less toward interest. This is the best part of buying on land contract (instead of renting). Just like a traditional mortgage, you build equity in the home as the months/years go buy.

Not only do you accumulate equity naturally through market appreciation, but you also build equity by paying the balance down slightly every month. See how it works, download amortization schedule. Interest rates on land contracts vary, but are typically higher than traditional mortgage rates.

Fair Market Value home value land contract

When not having to deal with traditional lending guidelines, part of that means you don’t have to deal with low appraisal issues when buying a home on land contract.

This is both a good and bad thing.  Good, because you can still proceed with owning the home (even if it’s not worth what the land contract is calling the purchase price). Bad, because if the appraisal comes in low you’re essentially buying a home with negative equity. That puts you into a position where you’re hoping the value goes up in the near future.

On a lighter note, it might not be such a bad thing because homes sold on land contract are often in disrepair, so a low appraisal may be expected (knowing that you’re going to make the updates needed in order to help increase the value).

Keep in mind, just because you spend $20K on a new kitchen, that doesn’t mean the value of the home is going to increase by $20K. Every market is different. The amount you spend on updates doesn’t necessarily equate to amount of increase in home value.  Fair market value is based on sold prices of similar homes in the area that have similar amenities and condition.

Down Payment Expectations

It is not uncommon for a seller to expect 10-30% down payment when buying a house on land contract.

It’s extremely rare to see a land contract where the buyer put 5% down or less, but it does happen. Keep in mind that the seller is usually looking to sell the home in order to get proceeds of the sale to purchase a new home or to relocate. If there are very little down payment funds the seller won’t be able to accomplish their goals in many cases.

The idea of a land contract is to provide a win/win solution for a unique scenario. The buyer gets to own a home (even if they have unique income/credit circumstances). The seller gets to sell their home even if there are some unique property circumstances. But if selling means they don’t get any funds up front, it may be a challenge to come to terms with the seller.

When to Refinance  land contract questions

Refinance out of the land contract as soon as you can.

Rates on land contracts are typically higher than traditional mortgage rates. Why stay in that loan longer than you have to? Make sure there are is not a pre-payment penalty on the land contract. A pre-payment penalty is when you are charged a fee for paying off the loan prior to a certain date. If the land contract has been in place for less than 12 months, the lender is going to treat it as a purchase.

Example: you buy a home on land contract in May, 2016 and seek to refinance out of it in December, 2016. Since you’re in the land contract less than 12 months, the new lender is going to treat the new loan as a purchase loan. The down side to that is you cannot use the new value of the home even if significant improvements have been made. The value will be the lesser of the purchase price or the appraised value. After you have been in the land contract 12 months, you can use the new/appraised value.

Recorded Land Contract vs. Non-Recorded

When it’s time to refinance, it’s very important to understand whether or not the land contract was recorded with the county when you purchased the home.

Typically, you’ll know by looking a recent real estate tax bill. If your name isn’t on the tax bill, that means you’re not the owner (in the eyes of the county), and the land contract wasn’t recorded. Don’t worry, it’s not the end of the world if the land contract wasn’t recorded. Conventional mortgage guidelines state that as long as the land contract was executed for 12 months or more, the new loan can be treated as a refinance.

However, if you’re seeking a government loan like an FHA loan, the land contract needs to be recorded for 12 months in order to treat it as a refinance. If you have been in the loan 12 or more months, and it wasn’t recorded, you won’t be able to “refinance” into an FHA loan, it’ll have to be treated as a purchase. The biggest issue with that is value (having to use the lesser of the purchase price on the land contract or the current fair market value). Simple solution: see if you qualify for conventional financing instead of FHA.

Conclusion

Buying a house on land contract can be a fantastic temporary solution for temporary circumstances. If the intention is to live in the home long term it is crucial to do the appropriate research (above) in order to set yourself up for long-term home ownership success.

By the way, if you do have unique income or credit circumstances you may be a good candidate for a portfolio loan.

mortgage loan officerQuestions?

I invite you to reach out to me directly. With extensive experience in land contract refinancing, I should be able to help you with your land contract financing needs. [testimonials]

Looking forward to connecting with you soon!

 

 

real estate investment loans

 

How to Refinance Land Contract

Everything you need to know about how to refinance a land contract and how to get approved.

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:

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 michigan portfolio lenderguidelines. 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:

  1. You don’t get any pat on the back for on time payments.
  2. 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:

Follow this guidance to set yourself up for success.

1. 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).

2. 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.

3. 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.

4. 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.

 

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.

pre approved home loan

 

Buying a House on Land Contract Eveything You Need to Know


How to Refinance Land Contract

Adam Lesner | NMLS 198818 | Troy, Michigan

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, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.

 

What is a Land Contract?

What is a land contract?

A land contract (or contract for deed) is a popular way to purchase or sell a home without having to deal with banks or lenders. The seller acts as the lender. This is an attractive route to take if the property that is being sold is unique, or if the buyer of the home cannot get approved for a mortgage for one reason or another.

buying a house on land contractWhen selling a home on land contract the seller acts as the private lender. The buyer provides down payment and makes monthly installment payments to the seller for an agreed upon period of time at an agreed upon interest rate. Usually land contracts are done on a 3 – 5 year balloon. Meaning the borrower makes mortgage payments on a 15 – 30 year loan structure, but in 3 – 5 years the existing balance needs to be paid in full (home is sold or refinanced with a bank at that time).

It’s a good idea to have the land contract recorded with the county in order to have a paper trail and make it official. Many times the seller won’t be willing to sign over the deed until the land contract is fully exercised. This means that the buyer doesn’t technically take full ownership of the property until all payments are made on the land contract.

Advantages of Selling on Land Contract

Imagine you’re trying to sell your home. You have several offers, and one is finally accepted. The inspection is done and shows that there are some significant issues with the property. It’s agreed that the degree of the issues are so serious that a lender would never approve the loan. This is because the appraiser would certainly have a laundry list of expensive items to be repaired before closing.

The good news is that they buyer is an experienced builder and could do most of the repairs himself. land contract winningThis is the perfect opportunity for a land contract option to be explored! The seller still gets to sell his home, and the buyer still gets to buy.

In addition to being able to accept a large down payment up front (usually 20% – 30%, selling on land contract also provides an opportunity for the seller to receive a steady flow of income. This would be for the duration of the land contract, and earning interest all the while.

Advantages of Buying a Home on Land Contract

With lending guidelines being pretty strict, it can be tough to get a mortgage if you have had credit issues recently, or have a unique income situation. A land contract may be your only option if you’re looking to buy in some cases.

This is great because it still gives you the opportunity to own your home! You can do upgrades, have pets, and live theland contract thumbs up American dream. It’s your house. Just make sure the county knows that. Get the land contract recorded when you buy.

The other advantage is that you get an opportunity to re-establish your credit. Making your land contract payments on time month after month will set you up for success when it’s time to refinance out of your land contract. Since the land contract holder will not be reporting your monthly payments to the credit bureaus (like a normal mortgage) you want to keep strict records of your payments. When it’s time to refinance the new lender will want to see a history of those payments to ensure you were on time, and consistent. If there were any late or missed payments your approval on your new loan is likely to be impacted.

Lastly, a land contract is great if you are a new business owner. Many times lenders will want to see 2 year’s tax returns before lending to self-employed borrowers. See here for an exception to that.

Refinancing out of Land Contract

As mentioned above most land contracts are done on a short-term, with the full balance being due at the end of the term. While you’re in the home you want to do everything you can to prepare for that. Think about the reason you bought on land contract… work on that.

refinancing out of land contractWhether there were credit issues, income issues, or property issues. Get squared away. The last thing you want to do it spend 5 years making payments on a land contract and find out that you can’t refinance because of how you filed your tax returns. Or maybe the property still needed a new roof and now the appraiser still won’t approve it on your new loan.

You don’t want to be in a position where you can’t pay the remaining balance on the land contract. The land contract holder is likely to take the property back if the terms of the contract allow. There may be negotiating room in the balloon depending on the individual. But do yourself a favor, and don’t make it come down to that. Get your ducks in a row, and be ready to refinance out of the land contract when it’s time.

Rates on land contracts tend to be a bit higher than what you’d typically see on a mortgage. If the land contract allows you to refinance before the balloon without pre-payment penalty, take advantage of that. As soon as you’re in the right financial position do what’s best for you. There is no need to stay in financing terms that are not appropriate for your situation.

An Alternative to Land Contract | Portfolio Loan

So often people think that if there is a unique borrower scenario, or a unique property scenario, a land contract is their only option. That’s true in some cases, but NOT all cases. If the situation is unique, a portfolio loan with a local lender or credit union may be your saving grace. These loans are funded with your local credit union or small bank, and is not sold on the portfolio loan great alternative to land contractsecondary market.

It stays in-house. So the lender is able to take more of a common sense approach than any other loan available.

Portfolio loans are designed to serve clients who fell on hard times, but are now back on their feet. Portfolio loans are also a great option for unique properties like non-warrantable condos, or homes zoned in commercial areas.

I invite you to reach out to me.

portfolio loansIf you are looking to refinance out of your land contract, or you want an alternative to buying on land contract,  reach out to me directly.

I talk to folks all over the country every single day who are relieved to find out that portfolio loans exist, and are often a fantastic alternative to buying on land contract. I have closed many portfolio loans for people who thought that a land contract was their only option.

We truly do our best to take a common sense approach to get you approved. If I cannot help, I will do my best to connect you with the right lender to meet your home ownership goals.

So give it a shot. At the very least, you’ll walk away with a plan to set you up for success.

pre approved home loan


 

Buying a House on Land Contract Eveything You Need to Know

 

What unique scenario have you seen where a land contract was the perfect solution?

Land Contract | What you need to know now!

Adam Lesner | NMLS 198818 | Troy, Michigan

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, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.