The three most common ways to pay for a home are with cash, using a mortgage, or by what's called a "land contract." A land contract is a written agreement between the seller and the purchaser that ultimately results in transfer of the title to property once all terms and conditions of payment are met (a method of “seller financing”). Unlike the more typical ways of buying a house, however, the property doesn’t officially belong the buyer until the debt to the seller has been completely paid off.

Why Would a Home Buyer Want a Land Contract?

If you’re interested in buying a home, but face financial obstacles—perhaps you have a low credit rating, uneven employment history, or would have difficulty obtaining a mortgage for some other reason—buying property using a land contract offers a way into homeownership you wouldn't otherwise have.

So, what's in it for the seller? A home seller might consider offering a home for sale by land contract in order to expand the pool of potential purchasers. Keep your eyes open for advertisements say the seller will accept a land contract (often listed as an "accepted form of purchase"). The most common forms of purchase are cash, conventional mortgage, Federal Housing Act (FHA) mortgage, and Veterans Affairs (VA) mortgage.

Land contracts are also commonly used to sell property that's been valued or priced so low that no bank or institutional lender would be willing to offer a mortgage for the sale.

For example, many banks will not provide a mortgage for $20,000 or less, even though the property value may be high enough to serve as security for the loan. The reason is that the total interest to be received is not high enough to balance the bank's cost and risk of making the loan.

When Ownership of House Shifts to Buyer Under a Land Contract

If you buy a house using a land contract, you don’t become its full owner right away. Upon entering into the agreement, the buyer receives what’s called “equitable title” to the property, which lasts through the entire term of the land contract.

By contrast, someone who buys a home the usual way, using cash or a mortgage loan, receives full title to the home at the closing of the sale. (Of course, the bank or other lender retains a “security interest,” allowing it to foreclose if need be).

What is equitable title? It means the purchaser has a legal interest in the property while making payments to the seller. The buyer can certainly live in the house and treat it as his or her own during these years. The transfer of legal title to the property is held by the seller until the buyer has made the final payment on the land contract.

This arrangement can lead to serious trouble if you fail to make the payments as arranged. The seller can file a legal action against you in court, called a forfeiture. The forfeiture returns all legal interest in the home to the seller and allows the seller to keep all payments you have made toward purchasing the home. Although you may have invested multiple payments, you will end up with no ownership right in the home after the forfeiture action.

How Do Home Seller and Buyer Figure Out Payment Amounts on a Land Contract?

The seller of the property typically decides how much of a down payment to require in order to enter into a land contract, as well as how much the payments will be each month. (After all, the seller may not want to wait for decades to be paid off.)

The typical payments would be a monthly amount calculated by the purchase price divided over ten years, plus interest. This can all be negotiated, however. But you'd be lucky to get a 30-year loan term.

Because the seller is not receiving a check at closing for the full purchase price (as would occur at a closing using cash or a mortgage), the seller might require a relatively large down payment, high monthly payments, or both. This helps reduce some of the risk the seller is taking on by becoming, in effect, a mortgage lender.

Summary of Differences Between Land Contract Sale and Mortgage-Financed Sale.

What Terms a Land Contract Should Include

For legal as well as practical reasons, a seller and buyer entering into a land contract will want to make sure to draft and sign a purchase agreement, (the so-called land contract).

Who actually drafts it depends in part on whose idea this is. The purchaser may, for example, prepare the initial draft and offer it to the seller in response to the seller’s advertisement to sell the property.

The land contract agreement should state the basic terms of the sale, such as the property address or description and the number of years over which payments will be made and at what interest rate, as well as the agreed-upon price for the home or property.

While many mortgages are for 30 years, land contracts are often much shorter. It's helpful to attach an amortization schedule to the land contract so the parties are clear on the exact amount of payments to be made to the seller.

The land contract should also state whether any fixtures or appliances are included with the sale and the date of closing. There should be a period of time stated during which the purchaser can have the property inspected and be able to negotiate any repairs based on the inspector's findings.

Most likely with the help of an attorney, you might want to add other terms of the sale that both buyer and seller feel are important.

All of these items are just like a standard purchase agreement. If a seller is not satisfied with the purchaser’s version of the land contract, the seller can counteroffer with a document that's mostly the same but has differing terms, and the purchaser may either accept the changes or make a counteroffer back to the seller.

How to Prove “Ownership” of the Property Before Having Paid It Off

If you are the property buyer, the fact that you will be making payments to the seller for the property without receiving a deed until all payments are made, most likely years later, should worry you a bit.

Fortunately, there’s a legal solution, known as a “memorandum of land contract.” This is typically a single-page document that sets forth the date and purchase price of the land contract, the names of the seller and purchaser, and a legal description of the property.

It should be signed by the seller. The memorandum of land contract will need to be filed with the appropriate registrar of deeds office so that the public is put on notice of the buyer's ownership interest.

Final Steps to a Land Contract Purchase

To protect yourself as the buyer, you may want to obtain title insurance for the property (as a bank would require with a mortgage). This helps make sure the seller truly owns the property, free and clear of any third-party interests, such as a mortgage, special assessment, or lien.

A title company or an escrow company should handle the closing, at which you and the seller sign the land contract. The company can hold the deed in an escrow account until you’ve made the final payment, t to be sure the title is transferred as agreed.

Holding the deed in escrow means keeping it in a safe place, often a security box, until the purchaser satisfies all of the terms of the land contract and makes the final payment due to the seller. At that time, the title company would release the deed to the purchaser for recording with the registrar of deeds, and the purchaser would become the legal title owner of the property.