Deed of trust homes, also known as land contract homes, are a great option for buying a property under certain circumstances. However, they do have the ability to hurt low income buyers in other situations. Here are a few of the most pertinent questions that you should be asking yourself before committing to a deed of trust, especially if you are defined as a low income buyer.
What are land contract homes?
The land contract home is a seller financed transfer of property negotiation that gives a buyer the ability to pay a seller directly instead of going through a bank mortgage program. Instead of transferring the deed to a third party like a lender, the seller keeps the deed until the buyer makes the final payment.
Am I a low income buyer?
Low income buyers are stratified into certain levels, but the major definition of a low income buyer is a household that does not make at least 50 percent of the median income of the local municipality. Most government programs prioritize low income buyers that are even lower on the scale. For instance, local agencies that distribute housing voucher programs must give at least 75 percent of their vouchers to households that make income lower than 30 percent of the local median.
What are the advantages of land contract homes?
The primary advantage of land contract homes is the ability to cut out the middlban. Keeping the flow of money out of a bank’s hands saves the buyer and the seller huge fixed costs that do not add to the equity or the profit of either party. These costs include origination, closing, and escrow costs as well as any extra inspections, appraisals, and deposits that the lender might dband in exchange for its participation in the deal. Overall, cutting out the lender middlban can save almost 10 percent on the total price of the transaction, although there is no hard and fast rule about how much the tally can be.
Sellers gain the advantage of opening up the property to buyers who cannot qualify for a traditional loan. This improves the chances that the property will get sold quickly and get off of the market listings before its value begins to deteriorate. The total speed of the transaction is also greatly improved. Lenders tend to slow down real estate transactions to a crawl, and when a lender is the party holding the money in hand, both the buyer and the seller are subject to its whims. Also, if you are a seller who is in need of a large lump sum, land contract homes and seller financing help to defer taxes. Large windfalls are taxed at the highest rates.
As you can see, most of the advantages of land contract homes are for the seller.
What are the disadvantages of land contract homes for low income buyers?
If the seller does not own the title outright, then the buyer can become a victim with no ability to protect himself. If the seller is still making payments to a bank and defaults while receiving payments from the buyer, then the buyer has a completely worthless contract with no ability to gain restitution. The contract between the buyer and the seller must also detail who is responsible for repairs and insurance on the home. In most cases, this is too much for a low income buyer. If the seller dbands that you take it, a property that is otherwise affordable may quickly become unaffordable.
In the case of an adjustable rate mortgage and built in balloon payments on the original mortgage, the buyer and the seller must also come to an accord. In most cases, the seller will have this solidified within the contract, meaning the buyer is on the hook if there is a huge change in the market interest rate. This can create a huge problb in a volatile market, as a low income buyer usually cannot sustain a huge change in the monthly mortgage payment on a land contract home.
Assuming that the seller does not own the title, if there are any other mistakes in the contract with the lender, most of those mistakes carry through to the buyer. The buyer may be further affected as the resident, because if a utility does not get paid or something is wrong with the zoning of the building, the resident may find his lights out and water off one day with no recourse available to him.
Even in the case with a seller owning the title, there are many instances in which a seller may yank a property away from a buyer who is in the middle of making payments. Make sure that there is no contingency in the contract saying that the seller can sell to another buyer who gives a higher offer later down the road.
There are plenty of advantages to land contract homes, but the disadvantages are definitely something to be considered if you are defined as a low income buyer. Consider the pros and cons of this kind of a transaction as a buyer before you commit to a contract, especially a contract with a seller that has not paid off the lender completely.
2 Point Highlight
For instance, local agencies that distribute housing voucher programs must give at least 75 percent of their vouchers to households that make income lower than 30 percent of the local median.
If the seller is still making payments to a bank and defaults while receiving payments from the buyer, then the buyer has a completely worthless contract with no ability to gain restitution.
