My Path to Home Ownership: Land Contracts

My first big step forward was when I moved from NYC back home to Michigan after the death of my father in 2011. My then fiancé (now husband) and I purchased a home on Land Contract. A Land Contract is when a seller is willing to finance you in purchasing their home if you have a good sized down payment.  There is usually a “balloon payment” at the end of the contract, the amount of which could vary from contract to contract.  The terms of the sale: down payment, interest rate, and balloon, payment at the end are up to each individual contract. The original terms of the Land Contract on our home was $74,900 with $10,000 down and a 30 year mortgage payment of the balance at 7% interest for 3 years, and then the balloon payment which was equal to the balance owed less all payments toward principal that had been made during the 3 years.

We knew that our credit needed help. I think our credit scores were in the low 600s and I had a vehicle repossession that would come off my credit report a little more than 3 years away from the purchase price, so we negotiated and got the land contract to $73,500, and offered 8% interest if they would allow us 4 years. They agreed and we put down $10,000 and had payments of $458.91 for 4 years. We were of course responsible for all insurances and taxes during these 4 years. Now that I know more about interest, offering a whole percent point more for an additional year probably wasn’t the smartest idea, but I wanted to be 100% sure that we would be able to keep our home. In 2015 we were able to obtain a traditional mortgage through a lender by the grace of God! I cannot tell you how many nights I worried about not being able to secure financing at the end of the contract.

land-contracts

Land contracts really are a gamble for both parties. For us, if we were not able to come up with the balloon payment, we lost the $10,000 down payment we had put on the house, any investments we put in to it, and all of the payments we made along the way.

Sellers are also at risk because the buyers could completely wreck the house and then disappear leaving them with the mortgage if they still have one, repairs to be made, and no tenant!

A land contract can be an absolute blessing for the right people with the right mind set, working to improve their credit and obtain the American Dream. I would warn to be aware of predatory lending when it comes to Land Contracts. I haven’t seen it myself, but I am sure that there are some people out there that would jump at the opportunity to boot you out for breach of contract if you slipped past the due date on your monthly payments, or your financing took longer than expected and you go past the end of the contract date. It really can be a leap of faith!

If you are thinking about obtaining a land contract in your pursuit of home ownership, be aware of the risks and set yourself up for success by knowing the payment is one that you can truly afford – don’t take on more home than you can pay on a worst case scenario basis. Have fun, good luck, and happy house hunting!

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