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| 11-25-09 | ||||||||||||||||||||
There are two common ways in which one can finance property and land. The first is by that of mortgaging. This involves the buyer purchasing the property agreeing to pay monthly installments to the lender while the lender pays the full amount to the seller. Thus the buyer becomes the mortgagor and the lender becomes the mortgagee. The second way in which one can finance a home is to enter into a contract for deed. This action is used in all fifty states and sometimes can go by various names. Some states refer to it as an installment contract or land contract. In either case, this is when the seller and buyer act directly with no lender and or middle-party. In a contract for deed the buyer agrees to pay the seller in monthly installments until the property is completely paid for. How Does A Land Contract for Deed Work? The best way to describe this would be by way of an example. Say a buyer is interested in a particular piece of property but lacks the proper funds to finance the home and is unable to apply for a mortgage due to his/her inability to meet the proper requirements necessary to obtain one. This is especially the case with young people who have as yet had no opportunity to firmly establish their credit. In cases such as these, a seller will enter into a contract with the buyer wherein an agreement is made to make monthly payments over a period of time. This process of course has its advantages and disadvantages. Advantages and Disadvantages In the eyes of the buyer it holds the obvious advantage of being a quick way to obtain property at the expense of an often times low down payment. Also, the closing cost on a contract is usually low as well. Not to mention that the seller gains an advantage in the interest garnered over the course of the payments. However, nothing is full proof and even the contract deed sale has its disadvantages. In the buyer’s case, the foreclosure process tends to go a might quicker than if it were under a mortgage. Another disadvantage of the land contract would be that the value of the property in question would be lessened by the repossession of the land by the seller. This in effect would bring the seller into a potentially worse situation than that in which he/she started. And for the buyer, if he/she were to default on a payment or violate the contract in some other way, then the property would be forfeit and the buyer would have to face the danger of loosing all money heretofore invested in said property. Is a Land Contract for Me? It is a requirement of all fifty states that a Land contract be done in writing. However, some parties wish to keep their transactions between themselves rather than have it recorded for anyone to view at their leisure. It is in this way that the contract for deed differs from a regular mortgage. This is not the case in every state but only in some. During the course of the installment plan any number of things could take place to put the buyer in a bad situation. The seller could die, go missing, etc. Since the deed remains in the hands of the seller until the property is paid off, this could put the buyer at risk. On the other hand, the Land contract provides a good opportunity for those unable to obtain a mortgage. At the end of the day, it is up to the interested parties to decide which direction to go. |
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