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How a Land Contract Differs from a Mortgage

by Sally Masters, P.A. 08/09/2020

Image by mohamed Hassan from Pixabay

A land contract and a mortgage have a number of similarities. For example, you can use either option to purchase a home Both loans must be repaid on a monthly basis.

Understanding the Differences 

A land contract is a legal agreement between a buyer and a seller. Rather than a traditional mortgage scenario with a bank, the seller becomes the lender. The buyer and seller agree on a price for the home then negotiate terms and a payment schedule. 

In many cases, these repayment terms follow a schedule of monthly payments much like a mortgage. However, a balloon payment for the remaining balance is often due within three to five years. At that time, you would then obtain a traditional mortgage to fund the remainder that's due. 

Land Contract Risks

While it can seem like a land contract would be an ideal way to secure a home, it does involve risks you need to know about. A land contract can be a way for you to close on a home if you aren't able to qualify for a mortgage that covers the full cost right away. The three to five years that a typical land contract lasts can give you time to improve your credit and increase your financial soundness. 

Before you agree to a land contract, though, be aware that the property is not yours until you make the final (balloon) payment. This means that if you make any improvements to the property during that time, you could potentially be out of your investment. You are also not building up any equity in the home during the time that the land contract is in effect. 

At any point during the land contract, your position as the buyer could be compromised. For example, the seller is the legal owner of the property until the contract has been fully paid. If they experience financial problems and lose the property, you would have no claim to it and would forfeit your payments. 

As the buyer, you are obligated to meet your payment agreement. If you don't do so at any time during a land contract, the deal ends. The property stays with the seller and you are out the money you've invested. 

Advantages of a Mortgage

With a mortgage, you must pay property taxes and honor your obligations to the lender. As long as you do so -- and avoid liens -- you have legal recognition as the property owner. 

A land contract can seem like an attractive alternative if you don't think you qualify for a traditional mortgage. Before agreeing to one, though, be sure you understand the pitfalls that could be involved. 

About the Author
Author

Sally Masters, P.A.

Trustworthy, reliable, hardworking---a committed and dedicated Realtor who has earned the respect and admiration of her peers and the many clients who have called on her to consummate an important Real Estate transaction.

For over two decades, Sally Masters has been successfully listing and selling homes throughout Naples, Marco Island, Bonita Springs, Estero, Ft. Myers and Cape Coral and surrounding areas. Today, she is recognized as one of Southwest Florida’s most outstanding marketing, negotiating and sales professionals. In 2018, this native of London, England joined the Signature International Premier Properties team, bringing her vast knowledge and insight of the residential, waterfront, golf course and estate home marketplace to one of Florida’s fastest growing Real Estate Companies.

Sally has few equals in regards to her list of industry-wide certifications and designations. They include being a Certified Luxury Home Marketing Specialist and an Institute Luxury Home Market member. Sally has earned a CIPS Designation (Certified International Property Specialist), the RSPS Certification (Resort and Second Home Property Specialist) the SRES Designation (Senior Real Estate Specialist) and the MRP Certification (Military Relocation Professional)

In addition, she has been the recipient of the prestigious Ad Miller Award, recognizing an individual who has contributed to the enhancement and preservation of private property rights. In August, 2018, Sally was featured in Forbes Magazine as a Real Estate Market leader for Southwest Florida.

Sally Masters’ network of clients stretches far and wide- both beyond the United States and throughout Canada and Europe. For years, she has successfully worked with the many international buyers and sellers who invest and call home to Naples and its surrounding environs.

Going above and beyond for her many clients and her commitment to keep her buyers and sellers well informed throughout the entire transaction process is what truly defines Sally’s highly acclaimed work ethic. She constantly receives referrals and new business from her many satisfied clients who enlisted her as their broker of choice and remain in close contact.

Sally continues to give to the community she has called home for many years. She is the active and proud founder of the www. Adopt-A-Soldier.org, a charitable organization that sends packages to our troops stationed overseas.