Land Contracts & FHA Loans
August 20th, 2007
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Whenever real estate sales slow you begin again to hear about land contracts, in essence installment sales where the buyer does not get title until some or all payments have been made.
Interestingly enough, the FHA allows land contract buyers to refinance such loans — thus enabling them to get title at closing. Given that land contracts can fall through for any number of reasons, there is a lot of reason to refinance with an FHA loan.
The FHA, however, allows borrowers with land contracts to have their new loan treated either as new financing or as refinancing. For the pros and cons of each option ask loan officers for specifics.
Here’s what the FHA has to say about land contracts:
Paying Off Land Contracts.
If the borrower will use the loan to complete payment on a land contract, contract for deed, or other similar type financing arrangement in which the borrower does not have title to the property, the new mortgage may be processed as either a purchase or a refinance transaction with maximum FHA-insured financing if the borrower receives no cash at closing. If all loan proceeds are used to pay the outstanding balance on the land contract and eligible repairs, renovations, etc., the appropriate LTV ratio is applied to the lesser of:
1. The appraised value; or
2. The total cost to acquire the property (the original purchase price, plus any documented costs the purchaser incurs for rehabilitation, repairs, renovation, or weatherization), plus allowable closing costs and, if treated as a refinance, reasonable discount points.
Equity in the property (original sales price minus the amount owed) may be used for the borrower’s entire cash investment. However, if the borrower receives more than $250 cash at closing, the loan is limited to 85 percent of the sum of the appraised value and allowable closing costs. Replenishment of the borrower’s own cash expended for repairs, improvements, renovation, etc., is not considered as “cash back,” provided the borrower can substantiate with canceled checks and paid receipts all out-of-pocket funds spent for those purposes.
If you have a land contract, or if you are considering one, please see an attorney or legal clinic for appropriate advice before signing any paperwork. Such agreements are complex, governed by state rules and can be one-sided if not reviewed with care.
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