Not everyone who hopes to become a homeowner can qualify for a standard mortgage. There are many circumstances in which those with good credit or good income could still struggle to buy their own home. For example, those who are self-employed or someone who has recently divorced could struggle to secure a mortgage on their own.
Purchasing a property through a land contract can be a great option for those with enough income to maintain a home but without the ability to qualify for a mortgage. As with any contract, a land contract may require review by a real estate attorney before its execution.
In a land contract, the seller is the lender.
When you execute a typical mortgage, a bank provides you with liquid capital to fund the purchase of real estate. That money goes directly to the seller or the mortgage holder. The property is the collateral for the funds the borrower uses to purchase the home.
In a land contract arrangement, there is typically no immediate transfer of funds, other than the down payment from the buyer. The seller provides financing based on the purchase price, and they allow the buyer to make payments over time to decrease the amount of principal owed. There may be a balloon date by which the buyer needs to secure outside financing or pay off the contract.
Land contracts can accommodate unusual circumstances.
With a standard mortgage, the lender has the right to refuse to finance certain properties that don’t meet specific criteria. That can mean that a potential seller has trouble finding a buyer for their property due to a lack of financing. A land contract allows the seller to sidestep that potential issue. The parties can agree on how to split the cost of fixing certain issues that will allow for a future mortgage on the property.
For buyers, a land contract can be a great option when their credit or income won’t meet a bank’s requirements. If you can’t qualify for a mortgage but have a solid source of income, a land contract situation could be the best solution that allows for homeownership in the near future.