Defaulting on a land contract payment can have extremely serious consequences. Although courts have recently begun providing more protections for buyers, it's not uncommon for one missed payment to throw a buyer into forfeiture, or even foreclosure if lateness has been a chronic problem. Read your contract, add up your payments and contact the seller; you may have more leverage than you think.
Most buyers who default on a land contract will find the property put into forfeiture, which basically allows the buyer, also called the vendee, to bring his payments current. If the vendee is able to pay everything that's owed, including interest and penalties, the land contract will continue to be in effect and the vendee's investment is protected.
Issues arise when a vendee is consistently late on payments; in this case, a vendor (the seller) may consider foreclosure.
Foreclosure is a permanent solution to the late-payment problem. In foreclosure, the entire amount that is owed on the balance is brought due and payable instantly. If the vendee is unable to refinance the loan -- or pay the vendor in full, in cash -- a judgment is entered against the vendee, he is evicted, and the property is sold to pay the balance due.
Depending on the state where the property is located, the vendor may opt to repurchase the property at the foreclosure auction; often, they're the only buyer present.
If you have accumulated a significant amount of equity in the home, you may be able to escape foreclosure. Some states reject foreclosure actions when the vendee has paid off 20 percent to 25 percent of the home's value. Although in years past it was common for courts to allow foreclosures on vendees who have paid into a home for 15 or even 20 years, that is no longer the case. If you've established a solid payment history, have occupied the home for a long time and only recently have fallen on hard times, you may be on more solid footing than you think.
As soon as you think there may be a problem, contact your vendor immediately -- don't wait until you are late. You may be able to work out a more flexible, temporary payment arrangement. Also, even with a small amount of equity, you may be able to refinance to a Federal Housing Administration-backed loan; the new Making Home Affordable program does permit the refinancing of seller-financed deals such as land contracts.
You could also consider selling your interest in the contract; however, be sure to read your sale agreement first to find out of that's permitted. Alternatively, your vendor may allow you to sell if he realizes that you won't be able to pay.
- The Federal Reserve Bank of Minneapolis: Risks and Realities of the Contract for Deed: Crystal Myslajek, January 2009
- Propex: Classroom: Installment Land Contracts
- Making Home Affordable: Homeowner Frequently Asked Questions
- National Foundation for Credit Counseling: Housing Counseling: Mortgage Delinquency