Land Contracts – Part V – For Buyers This Time
by Evan Vanderwey on 19/02/10 at 8:21 am
Buying on Land Contract?
Because the $8000 first-time homebuyer tax credit is available to you, and because you may have damaged credit, you may be considering buying a home using a Land Contract. The following is meant to be helpful but is not an exhaustive list of things to consider when buying a home using a Land Contract. It is always important to get legal advice from an attorney.
That said, read these paragraphs as a good start to getting your mind around how the Land Contract works:
1. The seller is your lender. The reason you did not have to submit a pint of your blood and promise your first born to the service of the government is because the entire process of “approving” you for the Land Contract is in the hands of the seller. The seller is motivated to sell the house and collect payments from you. If you say that you can make the payments, the seller does not have a lot to go on other than your word.
2. Always pay on time and pay in a way that can be proven. Use a check that clears through your bank. Ask the seller if you can directly deposit your payment in their bank account so that your on-time payment doesn’t spend a week on the sellers desk before they get around to depositing it. When you apply for a refinance mortgage in a few years, you will need to prove that you have made your payments on time. The lender will not likely accept a letter from your seller stating that your payments were timely.
3. Understand up front exactly what you will need to prove in order to get approval for a mortgage. Know your credit score and how to improve it. Know what your income documentation will need to be, and be sure you can submit it. Know what amount of cash (if any) will be required at the time of refinancing the Land Contract into a mortgage. Know these things up front and then work to accomplish them. Consider asking your seller for a discount if you get approved and pay them off early.
4. Know up front what the loan terms will be when you finally refinance into a mortgage. You need to know that you will be able to afford not only the Land Contract payment but also the payment on a mortgage – likely an FHA mortgage when that time comes. Contact a mortgage broker ahead of time to make sure you know what your payments will be.
5. While you are paying on your land contract, eliminate all of your other debt. Going into a Land Contract refinance with credit cards and car loans on top of student loans if they exist is not the strongest position to be in. You will increase your chances and ability to “perform” or pay off the Land Contract if you have no other debt. Get serious this time, make a plan and pay off your debt. I recommend Dave Ramsey’s Debt Snowball method.
6. Keep open communication with the seller. You are in this together until you pay them off. Get to know them a little bit. Stay in close communication. If you ever have trouble paying on time, call first. They would love to know about it ahead of time so they can plan for a delayed payment. Don’t over do it, but ask for help if you need it. The seller of the home you purchased wants this to work out. Work together.
7. Consider, if you are in need of land contract financing, writing letters to sellers in this market. Drive around the neighborhood you would like to live in. Write down the addresses of five or ten homes you would be interested in seeing. Write a letter to the current owner and ask them if they would consider selling the home to you for list price using a land contract. This may not turn up anything, but there are more than a few frustrated sellers out there, and you might just get one on the right day. You are solving their problem and they are solving yours. It’s the free market at its best.
8. You have a right to make sure that the seller is making on-time payments to the lender, taxing authority, and insurance agency. The last thing you want, and likely your biggest risk in buying this home in this way, is for the seller to default on HIS mortgage or tax payments. If he gets too far behind, then you could lose your home to HIS bank. A simple understanding ahead of time that the seller needs to prove that these things are paid on time will save any heartache later.
9. Know your rights. If you have a hard time making the payments, and your seller is unwilling to work with you, be sure you know what to expect if the seller takes legal action. Make sure your Land Contract has a forfeiture clause in it. This clause makes it easy for you to get out of the deal if you need to, and it’s easier for you to cure past-due payments should that ever happen. A good place to start is the Michigan Bar Association’s white paper on Land Contracts. Read this.
http://www.michbar.org/realproperty/pdfs/LandContract.pdf
Related posts:
