Also called an installment land contract, contract for deed or contract for sale, a land contract is a property sale where the seller holds the title of the property until you have paid for it. Absent a mortgage, the property is purchased directly from the seller who still owns the property until you have paid for it per the terms of a land contract.
The land contract will lay out the terms including the sales price, down payment amount, interest payment and the number of periodic payments and whether they are monthly, quarterly or annually. The contract will also spell out who is responsible for property insurance and property taxes.
For those with a less than stellar credit a purchasing with a land contract may be the best way to buy a home. Although the interest rate may be higher, the term of the loan shorter, and payments higher, than a conventional loan, a land contract may allow a buyer to purchase a home when they might otherwise not be able to do.
Usually shorter in term than a conventional loan a land contract may offer payments for a term of five years or more with a balloon payment due at the end of the term. This may require that the buyer refinances the balloon amount at the end of the term with a conventional loan or a renegotiation of the land contracts terms.
The biggest risk is that you could lose it all if you fail to make payments in a timely manner or can't raise the balloon amount at the end of the contract. You will also have expenses that you will not have as a renter. Even though the seller still owns the home until you satisfy the terms of the contract you may be responsible for any maintenance and repairs long before you own the home outright.
Unless otherwise noted in the land contract, property insurance, and property taxes will also be your responsibility. When added to a higher interest rate, and a shorter term than a conventional mortgage when buying a home, the cost of a land contract can be considerably higher.
Monthly payments are often calculated as adjustable rate mortgages (ARMS), to keep payments low and add a balloon note at the end of the term. When you reach that point, you will need to pay off the remainder of the debt from another source. This can be a conventional mortgage, money you have saved or been gifted but the point is, it is money that you will need to have at the end of the term. That is if the payments and down payment do not cover the debt amount before the term ends.
The only way to know if a property really belongs to a seller is to have a title check performed. You will also want to know if the home has any second mortgages, liens or other encumbrances on the seller's ownership of the property. Whether buying from the seller themselves or through a Realtor(r), hired by the seller, your interests are not being protected. Hiring a reputable real estate attorney to walk you through the land contract before you finalize the purchase can save you a great deal of stress and money.
When buying a home, you have many choices for financing if you have stellar credit, a solid viable income, and a down payment. However, in today's mortgage market, if you are missing the key piece, 'stellar credit', acquiring a loan may be difficult for some who are buying a home. If you have their other two pieces of the equation, solid income, and a down payment, a land contract may be a great option for you when buying a home.
Many sellers who own their property outright don't want a lump sum of money for their home and find that spreading their return on the property over five, ten or more years gives them an income without the tax liability of selling outright. However, finding sellers who want to enter into a land contract is not easy. You may be able to find a Realtor(r) who is willing the extra time and legwork to find a seller who is willing to sell using a land contract.
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