How does a land loan work
How Land Contract s Work
In Ohio, a land contract, also called a land installment contract, is an agreement by a seller to sell you land and a house on that land for an agreed price. You, the buyer, agree to make monthly installment payments directly to the seller, plus interest, until paid in full. The seller agrees to transfer the deed (ownership) to you after all of the payments have been made.
IS A LAND CONTRACT GOOD OR BAD?
Buying a house on land contract is not the preferred way to purchase real estate. The usual method is to borrow money from a bank, pay the full purchase price for the house and then make your mortgage payments to the bank. This method is best because you own the house immediately. Under a land contract, you will not own the property until you have made all of your installment payments.
Also under a land contract, until you have paid 20% of the purchase price or made five years of payments, if you miss a payment the seller can evict you from the premises just as if you were a tenant. If this happens, you will loose your down payment, installment payments, real estate tax payments and possibly the value of any improvements you made to the property.
Because of the possibility of the buyer losing everything he invested in the property, land contracts are typically only used by buyers with poor credit who cannot obtain a bank loan to purchase the property outright. On the other hand, land contracts help those who lack good credit to have a chance to own real estate. Paying land contract installments for several years may even help convince a lender that the buyer is credit-worthy.
Because the land contract buyer is usually unable to obtain a mortgage loan to buy the property outright, the seller may be able to ask a higher purchase price and charge a higher than average interest rate. Some land contracts are for relatively short time periods, for example five years, after which the buyer must obtain a bank loan for the remaining amount owed to purchase the property in one payment. This payment is called a balloon payment. A land contract that contains a balloon payment will be a problem for the buyer who cannot get a bank loan after five years and may cause the buyer to loose everything he paid for the house.
However, it is critical before someone enters into a land contract that he establish a financial plan to fix whatever is preventing him from getting a loan. Poor credit is fixable over time, but to fix it you must first know what is wrong with it and what to do to improve it. A visit to a non-profit credit counseling agency will help you understand the problem and how to go about fixing it.
IS EVERY AGREEMENT TO PURCHASE REAL ESTATE A LAND CONTRACT?
There are many agreements to purchase real estate such as a lease with an option to buy and rent-to-buy agreements that are not land contracts. Land contracts are very specific and must conform to requirements found in Ohio Revised Code Chapter 5313. For example, under Ohio law, the land contract must be for a home and the property the home sits on, not just land. If you are considering a land contract, have a lawyer look over the agreement. Land contracts generally involve many tens of thousands of dollars and can last for decades, so before signing one it is important to take the time to get a legal opinion. Not all land contracts are the same. The provisions of one land contract can vary substantially from another.
CAN I BUY A MOBILE HOME ON A LAND CONTRACT?
A mobile (manufactured) home can only be sold on land contract if it is permanently affixed to (e.g. a part of) the land being bought. One way to tell if the mobile home is a part of the land is
to see if there are wheels attached or if it is on a permanent foundation. But how the mobile home is treated for tax purposes is the only way to tell for sure if it is considered permanently affixed to the land.
Any mobile or manufactured home that is not taxed as real property is subject to an annual manufactured home tax, payable by the owner, for locating the home in Ohio. See, Ohio Revised Code 4503.06(C) . If the tax department of the county auditor's office only collects real estate taxes on the property, then the mobile home is part of the land. However, if the tax department is collecting a mobile or manufactured home tax, then it is not considered permanently affixed to the land and cannot be sold on land contract.
WHAT SHOULD I DO AND ASK BEFORE I SIGN A LAND CONTRACT?
After you sign a land contract, you are legally bound by the terms of the contract. The time to ask questions, get information and change the terms of the land contract is before you sign it. Below are questions you should answer before you sign a land contract.
- Who owns the property you are buying?
T he only way to be sure that the seller owns the property is to get a copy of the seller's de ed and hav e your lawyer look at it.
The seller cannot give you clear title to the property if there are outs tanding claims against the property. All claims against the property must be filed at the county reco rder's office. Check there to see if the seller has clear title to the property.
T his should be part of the agreement. Usually this re sponsibility falls on the buyer and can be quite expens ive. for example i f the septic system needs replaced.
Before a house is purchased, by land contract or otherwise, the buyer should throughly inspect it. This is usually done by a pro fessional housing inspector who can look at the furnace, roof, pipes, electrical and septic systems as wel l as inspecting for termites, mold. leaks and foundation cracks. Talk to the neighbors and contact the pr operty's prior renters or purchasers for further information. If the seller agrees to fix something, get it in writing or it may not be binding a fter the contract is si gned.
U su ally the buyer pays these costs. Find out how much they cost and make sure you can afford to pay for them as we ll as your monthly land contract payment. The county auditor can tell you if the re are any unpaid taxes due and owing on the property.
What does the land contract s ay about the down payment if you miss a monthly payment and loose the house? Most land contracts state that the buyer forfei ts the down payment if he defaults on his monthly payments.
Normally the seller will have his a ttorney draw up the land contract. However, the buyer has a righ t to have his attorney look it over in advance of signing it. This is the buyers las t c hance to make any changes to the land contract. Once the contract is si gned, it is legally binding on all parties and cannot be changed unless both parties a gree. Also after the land contract is signed, the law requires that it be recorded at the county recorder's office.