The line that separates a Rent-to-Own and a Land Contract is blurry. While both situations are ideal for a buyer with less than ideal credit or finances, their difference lies in the overall buying process.
Rent-to-Own is where the buyer pays rent for a property that they have the option to buy. But only a portion of their payments goes toward a down payment when it’s time to purchase the home. The buying process with a Rent-to-Own is through a traditional mortgage lender.
A Land Contract, also called Contract for Deeds or Installment Land Contracts, is where the purchase is completed directly with the property owner. You don’t own the property until payments laid out in the contract are fulfilled.
What Is A Land Contract and How Does It Work?
If you’re having difficulty obtaining a typical mortgage, or simply want to avoid going through a bank, then using a Land Contract to buy a home or property is the way to go.
A land contract is a seller financing option. Instead of getting a traditional mortgage from a bank or lender, you directly pay the seller.
Like a Rent-to-Own, in a Land Contract, the seller keeps the house’s title until the property is paid in full, but you get an equitable title as the buyer in the Land Contract.
You could also pay the remaining balance by getting a traditional mortgage through the bank.
Another option is called a Wrap Around Land Contract. In a Wrap Around contract, the seller pays the bank and keeps the difference between the mortgage and your payments. Additionally, you can get the deed to the property immediately.
However, if the seller stops making mortgage payments, the bank can take the home back using a junior lien.
Finally, besides the monthly payment, there are also installment payments periodically throughout the contract and a balloon payment. A balloon payment is a repayment of the outstanding principal made at the end of the contract.
Land Contract Vs. Mortgage
The difference between a Land Contract and a mortgage is that the seller finances a Land Contract, and a bank or lender finances a mortgage.
However, because Land Contract is seller-financed, some other differences come with it. It’s always a good idea to know the pros and cons of any decision you make, especially when it comes to a big investment such as a home or property.
Benefits and Risk of a Land Contract
| Pros | Cons |
| ● Easier to get Financing. This is an excellent opportunity for anyone with bad credit to purchase a property. ● Little to no closing cost. ● Ability to transfer the balance to a mortgage. If you want a bigger space but can’t afford it through traditional financing, you can use a Land Contract then transfer it to a mortgage when the balance is smaller. ● Benefits the seller. Like a Rent-to-Own, if the buyer defaults on payments, the seller can keep the property and the money. ● The seller keeps the deed. Until the loan is paid off, the seller can keep the deed. But, the buyer can still build equity in the property. | ● You rely on the seller. Similar to a Rent-to-Own, if the Owner doesn’t pay mortgage or taxes, then there is potential for you to lose the property. ● Some states don’t recognize land contracts. There are also some states that favor the buyer in land contracts. Have an attorney look over your contract before signing on the dotted line. ● It gives you time to build your credit. If, in the end, you decide to pay the rest of your land contract by getting a mortgage, good credit is still necessary. ● High-interest rate. Because of the risk at the seller’s end, they are likely to have a rate with higher interest than the current market. |
Benefits and Risk of a Mortgage
| Pros | Cons |
| ● Buying a home without saving enough money for a market that won’t wait for you. Using a mortgage to buy a house and make payments instead of saving money for a lifetime. ● Write off your mortgage interest. Your income tax payments are decreased and lower the overall cost. ● Improve your credit. If your mortgage is in good standing, it raises your credit score, which can help you get more credit for a car loan or credit card. | ● You could still lose your home. If you fail to pay your mortgage, the bank has the right to take back your home and you lose money on the house and improvements you’ve made. ● Property Depreciation. You could end up being “underwater,” meaning you owe more on the house than its worth if the value drops as the market is affected. ● The risk of an adjustable-rate mortgage. While it often includes a lower interest rate, your overall payment can increase substantially over time and could end up not being affordable to you. |
Final Thoughts
All of the options listed above, Rent-to-Own, a Land Contract, and a Mortgage, all have risks attached to them. The most fearful of these risks is losing your home for nonpayment. The decision to use these options is ultimately your choice to do what is best for your financial situation and your goals for the future.
No matter the situation, be sure to have a real estate attorney look over the process to ensure you get the best deal at the end of the day.
Sources:
Lease-to-Own or Land Contract? | Nasdaq
Land Contracts: What They Are And How They Work | Rocket Mortgage
Land Contract: 11 Things You Should Know (2022) (gokcecapital.com)
Does Mortgage Collateral Have to Be a House? (sfgate.com)
Pros and Cons ofLand Contracts vs. Mortgages: What’s the Difference? (thebalance.com)