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Land Contracts

What is a land contract and what are the dangers involved for the buyer?

Land contracts vary widely from transaction to transaction.

In most cases, no grant deed is recorded. The buyer rarely obtains a new mortgage loan at the time of purchase. Instead, the new owner makes payments to an intermediary, who then makes payments on the sellerís mortgage, which is still in place.

Keep in mind that such an agreement usually violates the lender's guidelines. If the lender becomes aware of a transfer of title on the property (which is why you usually don't record the grant deed), they can exercise the "due on sale" clause of the note. This would require you to refinance the loan or sell the property. Since many who buy on land contracts have problems qualifying for a mortgage, you can see how this can lead to problems.

At the same time, lenders generally only check for transfers of title if the loan becomes delinquent.

Within a certain number of years, it is expected the buyer will be able to qualify for a loan. At that time, they will obtain a new mortgage and pay off whatever amount the land contract requires. Then a grant deed is recorded and full ownership is conveyed.

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