Land contracts and mortgages are both forms of real estate financing. Land contracts are private financing contracts held by property sellers. Mortgages are extended through banks and mortgage brokers. Land contracts generally are governed by individual state laws. Mortgages are governed by state laws and some federal laws.
Sellers transfer property titles to buyers in both mortgage- and seller-financed real estate sales. A seller is usually fully paid when a buyer obtains a mortgage, so his legal interests in the property terminate at closing. Sellers record land contracts, like banks record mortgages, in county land records. Sellers, like banks, may foreclose on a land contract if buyers default on payments. Sellers convey warranty deeds to buyers, extinguishing all their property interests, when land contracts are fully paid.
Land contracts avoid certain closing costs traditionally associated with mortgage transactions. For example, a buyer's real estate mortgage typically requires payment of application, origination, mortgage broker, processing and appraisal fees. Some government-backed loans, such as those secured through the Federal Housing Administration and Veterans Administration, incur fees for pest and code compliance inspections. A seller often pays part of the purchaser's mortgage-related closing costs, so sellers can save themselves money by financing land contracts because they don't have to contribute to buyers' mortgage costs.
Land contracts usually entail short-term financing for one to five years, with a balloon balance due at the end of the payment term. Mortgages can also be structured to include short-term payment plans with balloon balances, but it is more common for mortgages to have longer payment schedules, such as 30 years, with no balloon balances. Sellers can also hold long-term financing with no balloon balances on land contracts, but such payment terms are infrequently offered to buyers.
Real estate buyers make payments on both land contracts and mortgages after closing. Payments on land contracts are generally monthly and are made directly to sellers. Payments on mortgages are also due each month to banks, mortgage lenders or third-party service providers. Purchasers entering land contracts usually receive amortization schedules at closing to keep track of payments and outstanding balances.
- MS Coast Real Estate: Land Contracts vs. Homeowners Mortgages
- Michigan Association of Realtors: Seller Financing
- Wisconsin Housing and Economic Development Authority: Frequently Asked Questions About Your Mortgage Payment
- My Purchase Options: Land Contracts Explanation
- Ohio State Bar Association: Land Contracts Provide Financing Alternative for Some Homebuyers
- VA Loans: VA Loan Guidelines
- FHA Home Loans: FHA Loan Closing Costs
- Genesse County Register of Deeds: Register of Deeds
Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.