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

Ever since HVCC – Home Valuations Code of Conduct – Loan Originators in all conduits have had their hands tied when ordering the valuation appraisal report for customers. HVCC kept the Loan Officer from choosing, ordering, or even talking to the appraiser until after the transaction was closed. Even worse, appraisers from out of area (say Jackson, MI for an Okemos, MI report) were routinely chosen by the Appraisal Management Companies (AMC’s) which severely compromised the integrity of the report and valuation.

The process was slanted toward choosing appraisers who would work for less money because the AMC’s profits were higher. This has resulted in lower than market value appraised values and longer wait periods.

Realtors especially will be glad to know that if this bill finally passes their Loan Officer will again be allowed to have normal communication with appraisers for the purpose of affecting smooth transactions through to closing.

Again, this is not done yet. But what is approved in committee is NOT the “moratorium” we were hoping for but rather a Total Knock Out of the entire code and most of the implications it carries with it.

Thank your local National Association of Mortgage Brokers member. What the banks and bankers were not motivated to do because it reduced their revenues, the brokers have been fighting for and will likely win for all of us. The consumer will be the biggest winner in this.

Over the past 24 months it has been an unpopular thing to be a mortgage broker and because of a few many of us were given a bad name. I have been proud to bring excellence in rates, service and advice over the past decade and look forward to serving you with the same in the next.

Need excellent rates, service or advice on a mortgage? Call a broker!

This link is to another good post on the topic:

http://www.housingwire.com/2009/10/22/house-panel-sunsets-hvcc-in-consumer-finance-bil/

That new debt just might put the breaks on your mortgage application process. It might not kill the deal, but it might. Or it might just slow everything down and send you through another round of paperwork. Lenders, now more than ever, are looking for stability in their customers’ financial lives. So before you buy that hog (or take on some other big life change) consider these to-be-avoided, attention-getting events…

New Debt. Lenders like debt-averse folks (as long as they’re willing to go into mortgage debt, that is), and taking another financial burden at the same time you’re buying a new house doesn’t exactly shout conservative. Of course, big-purchase potential seems to abound at new-house time (appliances, furniture, renovations). That doesn’t matter. WAIT. If you can avoid the temptation, you’ll avoid increasing your debt-to-income ratio, the “back-end” ratio, as we call it.

New car lease. Oddly enough, new car leases are very popular with people moving into new homes. Maybe they just think it’s time for change all around. But leasing a car is no different than going out and buying one because it has the exact same effect on your back-end ratio. So wait on the lease. Your old car will fit into your new garage just fine.

The Job Change. Lengthy employment suggests stability, responsibility, and security—top-spot traits on any good-customer profile. Even a promotion bringing more income can be a liability if it suggests risk. Now, you don’t always have the luxury of postponing a promotion, but you can postpone quitting your job and enrolling in community college to “find yourself.” At least for a few weeks. Yourself will wait. It’s not going anywhere.

Packed paperwork. Keep close at hand any and all files and papers that have anything to do with your finances. Yes, it’s a strong temptation to box up all that stuff for the moving van, but if a new round of paperwork has to be initiated or a number substantiated, you don’t want to make matters worse by adding to the delay. There’s plenty of delay built into the process without your contribution.

Gifts. On an FHA loan, a gift as a source of funds is acceptable, but only from a blood relative, so make sure the relationship is documented. The idea here is that no funds have originated from any debt-increasing source, that the gift is truly a gift.

Tax returns. Yours have been filed over the past three years, right? Tax returns aren’t collected at application, but they are randomly checked thru the 4506 IRS tax form. Unless they’re needed for an MCC credit or a self-employed / commissioned borrower, returns are only checked for a “filed” status. But an un-filed return can halt the process real quick.

Bottom line? Go static. Put all major life changes (those you can somewhat control, anyway) on hold. Keep in mind that the mortgage application process is not a fixed snapshot of your financial life. Think of it more as surveillance footage watching you right up to closing. So go along quietly, responsibly, like you always have, sign your papers, and then go change careers or buy a motorcycle.

I thought about these things when I got an email this week describing a sales technique banks are using with potential mortgage clients. In a nutshell, they’re arguing that if you originate your loan with a broker, there’s a very good chance you’ll have your closing delayed due to the re-disclosure provisions of Reg Z; whereas a bank, unhindered by such nuisances, can get you to closing quicker. Therefore—by this logic—banks are the better bet.

hmmm…This is clearly folly. So do I answer it? Or do I let it go?

At the risk of “being like him myself” and just adding to the noise, I’m going to answer it because there’s more to this than an argument between banker and broker. There’s also the client whom these rules are meant to protect.

As I pondered how to respond, my first thought was—naturally—defensive. After all, I’m a broker, and them are fightin words. But then I thought, hang on. Rather than turn this into a mud fight, this might actually be an open door for re-emphasizing how a good broker is still your client’s best option.

Let’s start with Reg Z. The re-disclosure piece to TIL (truth in lending) was intended to prevent the bait and switch. You know how it works. A client is informed early in the process about the rate and certain fees (the bait), but when she sits down at the closing table, lo and behold, they’ve changed, gotten bigger, multiplied even (the switch). Most people don’t walk away from the table at this point, and that’s why the practice has been so lucrative.

A couple of observations…

1.  The law was meant to protect consumers from a dishonest practice. So why originate a loan with someone exempt from it? The incentive to be as truthful as possible as early as possible on disclosure of all the costs involved lies not with the bank LO who’s exempt from this part of Reg Z, but on the broker whose livelihood depends on compliance with it. Your client has a stronger basis for trust with the one who has the stronger incentive for full disclosure.

2.  Brokers who used such practices were also those likely to push b-grade paper, and those guys are gone. If your broker has survived the shake-out of the industry, then you’re most likely dealing with someone who’s been doing things right and above-board. Banks haven’t experienced the same “refining” effect of the housing crisis that mortgage brokers have. And if such brokers have survived, there’s a good chance that they’re doing it as bank LOs.

A couple of strong arguments aside from Reg Z considerations…

1.  Speaking of survival, you might not realize just what keeping the doors open has entailed for me—and brokers like me—over the past few years. Those still standing went through something like this:

• 3 hour state-administered test on everything from calculating APR to TIL to past laws pertaining to the mortgage-lending industry
• An audit of accounting books, procedures, financial position, and a random audit of ALL files (closed and withdrawn) from the past 36 months
• A net worth requirement at all times of $70,000 liquid cash in a bank

…and no bank LO can say any of that. Don’t hear me wrong. There are good, conscientious loan officers working out of banks, but they simply haven’t proven their professional commitment to the industry in the same concrete, measurable ways.

2.  And this may get to the heart of the matter better than anything else–By definition a broker provides flexibility that a bank LO just can’t. When my client is declined a loan from Lender A, I find out why, look for a remedy, help my client make adjustments, and then move on to Lender B. And I can do the same for Lenders C,D,E,F,G,H…you get the idea. But a NO from the bank is a NO to that client. No loan, no mortgage, no house, not from us anyway.

I hope that you can hear in this, and in all of my letters and blog posts and emails, that this is not just a “job” for me. It has been and continues to be a crucial part of my life’s purpose. Bringing excellent advice, service and rates to the mortgage industry—as low as it has stooped in the past—is what I do. And I’m not going anywhere.

I’m no Solomon, but I do know the mortgage lending business. And while banks are promoting their Reg Z exemption as an advantage and calling it wisdom, a closer look shows such thinking for the folly that it really is.