Land Contract Vs. Mortgage

Despite a variety of traditional loan options, sometimes financing the purchase of a home requires a more creative solution. When your credit rating, debt load or lack of funds prevents you from qualifying for a traditional loan, or the economic environment is making selling your home difficult, you may want to consider alternate options. A good place to start is by weighing the pros and cons of a land contract vs. a mortgage.

Features

A land contract and mortgage are legally enforceable purchase agreements. While they share common features such as loan terms and interest rates, each also has features that in total make them significantly different. Among these are the number and degree of negotiable items within the contract, and the degree of third party involvement. The legal aspects of getting a mortgage determine what you can and cannot include in the contract, as well as a system of checks and balances, while in a land contract the buyer and seller are free to include anything on which they mutually agree. In addition, in a traditional mortgage, the sales transaction includes one or more third parties, the most important of which is the lender, while a land contract usually involves only the buyer and seller.

Cost Considerations

Upfront and long-term costs vary widely between a land contract and mortgage. In many cases, the price you pay when financing with a land contract is higher than with a traditional mortgage. In addition, if your land contract extends only a few years it will most likely include a balloon payment. You will need to save this amount during the term of the contract or ensure you will be able to get a mortgage to cover and finance this amount. Upfront costs, mainly in the form of closing expenses, are greater with a traditional mortgage. While a land contract may include upfront costs such as an appraisal and home inspection fee just as in a mortgage, other costs such as loan application and origination fees, points and private mortgage insurance are often nonexistent in a land contract.

Tax Considerations

Finally, when you take out a mortgage you receive the deed to your property at the time you close on the loan. In contrast, with a land contract you may not receive the deed until you either have a substantial amount of equity in the home or in some cases, pay the contract in full. Because you do not legally own the home, you are not eligible to claim the tax benefits of home ownership, such as interest deductions. This can be a significant drawback to purchasing under a land contract.

Other Issues

When you finance a home with a mortgage, you have only yourself to worry about as far as making monthly payments. If you purchase your home under a land contract and the seller stills holds a mortgage for the property, you have an additional concern. In a case where the terms of the seller's mortgage states the home must be the seller's principle residence, the lender can call the loan if he finds out you are buying the home under a land contract. If the seller fails to make monthly payments, the lender has the option to foreclose on the home. In either case, you may have no choice other than to vacate or take out a traditional mortgage if you want to remain in the home.

References

• The Standard Legal Law Library: Land Contracts-When and Why a Land Contract Males Sense
• Mortgage Loan: Benefits and Risks of a Land Contract
• The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs