In a purchase money mortgage agreement, the seller is paid in full and transfers title to the property on the closing date. The title is transferred to the buyer -- although in some states the lender is given physical possession of the title deed -- and the lender holds a mortgage on the property. Under a land contract, the seller retains legal title to the property, along with possession of the title deed, until the buyer pays the final installment.
Most mortgage lenders are banks, and banks use standardized mortgage terms with respect to issues such as down payments, installment payments and interest rates. The better the buyer's credit, the more favorable these terms will be. Buyers who use land contracts are often unable to obtain commercial credit, and many cannot afford a down payment. Since the seller who finances the purchase is usually not a lending institution, the terms of a land contract can be far more flexible than the terms of a mortgage agreement.
If a buyer with a purchase money mortgage on his property defaults on repayment, the lender can auction the property to satisfy the mortgage debt. If the proceeds of the sale exceed the amount of the debt and the cost of the auction, the excess is returned to the buyer. This amount may be substantial if the buyer defaults after many years of paying installments and thus has built up a lot of equity in the home. When a buyer under a land contract defaults, the buyer has no equity in the home and cannot recover any of the installments he paid.
Foreclosure vs. Repossession
When a buyer with a mortgage defaults, the lender must institute foreclosure proceedings before evicting the buyer. Even after the property is auctioned, many states allow the buyer a "right of redemption" -- a period of time, typically between one and three years, to reclaim the property by paying the new owner a certain amount of money specified by state statute. If a buyer under a land contract defaults, the seller simply seeks a court order of eviction and has local officials physically evict the buyer if he refuses to leave voluntarily. The buyer has no right of redemption, since he never owned the property.