LAND CONTRACT SELLER AND BENEFITS: When selling a home on Land Contract, the Seller takes the position of first lien holder. Sellers can ask for a credit report, proof of income, and may require an explanation of any negative reports on a Buyer’s credit history. Often times, Buyers have had medical expenses, loss of a job, or divorce in their past which may explain low credit scores.

REPRESENTATION: As a Seller, it is in your best interest to be represented by a qualified Realtor, versed in Land Contract nuances. Your Realtor will offer invaluable advice and guidance throughout the selling process, and help you understand your options so you can make good decisions.

DOWNPAYMENT: Typically, Sellers will ask for 10% or more of the purchase price as a down payment. The Seller will have costs associated with selling the home including real estate commissions, transfer taxes, property tax prorations, etc… The down payment will cover those costs and give the Seller confidence in the Buyer’s ability to afford and maintain the property. It will give the Buyer a vested interest in taking good care of the property and a sense of ownership.

TERM: Terms of Land Contracts vary widely. Rarely, Sellers will finance the full term of the loan. More frequently, they will finance for 2-5 years, and then require a balloon to pay off the balance of the loan. At that time, the Buyer would need to get a mortgage through a bank in order to pay off their debt to the Seller. It is the Buyer’s responsibility to satisfy the agreements made in the Land Contract and to qualify for a mortgage when the balloon is due. If they are unable to secure a mortgage under the agreed upon terms, the Seller can either renegotiate the terms of the Land Contract, or begin foreclosure proceedings.

INTEREST RATE: Legally, the most interest a Seller can charge on a Land Contract is 11%. Currently, it is more common to see rates between 6%-9%. This is a negotiable item. Sellers often charge slightly more than a bank would because they are taking a risk on a Buyer with a lower credit score. The higher interest rate helps to offset the risk associated with the loan.

PAYMENTS: Monthly payments can also be negotiated to suit. Even though there may be a three-year term to the Land Contract agreement, loans may be amortized out over a 30 years, so that the monthly payment is lower, or based on a shorter term which would have a greater effect on paying down the principal amount of the loan. For instance, if the purchase price of the home is $50,000 with a down payment of 10%, that would leave a balance of $45,000. If it is amortized over 30 years at 6% interest the monthly payment would be $269.80. At the end of 3 years, the payoff due would be $42,856.90. The same amount and interest rate over 15 years would offer a monthly payment of $379.74, with a 3 year payoff of only $37,597.52. The longer amortization, the lower the payment but the more interest earned. The shorter amortization has a higher payment, building the Buyer’s equity, but paying less interest. You can go to the following link to plug in your own numbers and look at sample payments, www.amortization-calc.com . Keep in mind, these figures do not include property taxes and homeowner’s insurance. The Buyer will have to budget to pay those separately each year and provide the Seller with receipts to prove they were paid.

CLOSING: Land Contracts can close in as little as 2 weeks. Title work must be done, but there is no mortgage and there are no underwriters, so the process is faster than selling a home with Conventional or FHA terms. Typically, at closing, the Deed will be placed in escrow with the Title company until balance due to the Seller is paid in full.
Posted by Joy Montgomery at 10:51 PM 0 comments
Labels: land contracts, real estate, selling home
BUYER’S GUIDE TO LAND CONTRACTS
INTRODUCTION: Land Contracts offer an attractive solution for many people who are dealing with bruised credit but still want to own their own homes. Buying a home on a Land Contract means that the Seller of the home does not have a mortgage on the property and therefore is able to take the role of lender and offering financing, instead of getting a mortgage through a bank. This article will explain some of the things to consider when buying a home on Land Contract.

LAND CONTRACT HOMEOWNER RIGHTS AND BENEFITS: When you buy a home on Land Contract, you will enjoy the many benefits of owning your own home. The Seller takes the position of first lien holder. You can deduct the interest you pay to the Seller on your income taxes. You may qualify for the first time homebuyer tax credit, which is a credit of 10% of the purchase price of the home up to $8,000, as long as you haven’t owned a home in 3 years. You have the right to sell the home as long as you can pay off what you owe to the Seller when the sale takes place.

REPRESENTATION: As a Buyer, you have the right, and it is in your best interest, to be represented by a qualified Realtor, versed in land contract nuances. The Seller typically pays all broker commissions and there is no disadvantage to you to work with a Buyer’s agent. Your Realtor will offer invaluable advice and guidance throughout the buying process, and help you understand your options so you can make good decisions.

CREDIT REQUIREMENTS: As a Buyer, you must know your credit score. Most Sellers will ask you to fill out an application and want to see your credit report as well as pay stubs or other proof of income. You can run your free credit report once a year through http://www.annualcreditreport.com/ . The report is free, but there is a nominal charge of $5-$8 per reporting agency to see your numeric score. If your FICO score is under 620, it will be difficult to qualify for a conventional or FHA loan. In this case, a Land Contract may be your best option. Since Land Contracts are offered by homeowners, they are more flexible and credit requirements will be unique to each individual homeowner. Sellers understand that Buyers seeking Land Contract terms typically have lower credit scores and are often willing to look at circumstances and income when making credit approval decisions.

DOWNPAYMENT: Typically, Sellers will ask for 10% or more of the purchase price as a down payment. You must understand that the Seller will have costs of associated with selling the home including real estate commissions, transfer taxes, property tax prorations, etc… Your down payment will cover those costs and give the Seller confidence in your ability to buy and maintain the property.

TERM: Terms of Land Contracts vary widely. Rarely, Sellers will finance the full term of the loan. More frequently, they will finance for 2-5 years, and then require a balloon to pay off the balance of the loan. At that time you would need to get a mortgage through a bank in order to pay off your debt to the Seller. You have to understand your current credit situation and make plans to improve it over the course of the Land Contract term so that you will be able to qualify for a mortgage when the balloon is due.

INTEREST RATE: Legally, the most interest a Seller can charge on a Land Contract is 11%. Currently, it is more common to see rates between 6%-9%. This is a negotiable item. Sellers will charge slightly more than a bank would because they are taking a risk on a Buyer with a lower credit score. The higher interest rate helps to offset the risk associated with the loan.

PAYMENTS: Monthly payments can also be negotiated to suit. Even though you may have only a three-year term to your Land Contract agreement, loans may be amortized out over a 30 years, so that the monthly payment is quite low, or based on a shorter term which would have a greater effect on paying down the principal amount of the loan. For instance, if you purchase a home for $50,000 with a down payment of 10% would leave a balance of $45,000. If you amortize it over 30 years at 6% interest the monthly payment would be $269.80. At the end of 3 years, you would have a payoff due of $42,856.90. The same amount and interest rate over 15 years would offer a monthly payment of $379.74, with a 3 year payoff of only $37,597.52. The longer amortization, the lower the payment, but you are building equity slower. The shorter amortization has a higher payment, but builds equity faster. You can go to the following link to plug in your own numbers and look at sample payments, http://www.amortization-calc.com/ . Keep in mind, these figures do not include property taxes and homeowner’s insurance. You will have to budget to pay those separately each year and be prepared to show receipts to the Seller.

CLOSING: Land Contracts can close in as little as 2 weeks. Title work must be done, but there is no mortgage and there are no underwriters, so the process is faster than buying a home with Conventional or FHA terms. Typically, at closing, the Deed will be placed in escrow with the Title company until balance due to the Seller is paid in full.