For those looking to extend their property portfolio, finance is important. Where some find raising finance simple, for others with bad credit, it’s not as straightforward.
Years ago, having a bad credit rating would have placed property out of reach for most. Yet, with bad credit being part of everyday life, more of us are turning to alternative means of financing.
One such way of this is the method of refinancing land contracts. Best of all, it’s the more common route for those with bad credit.
Here we look further at what refinancing land contracts means. We also consider just how those with a bad credit history can access this financial solution.
The Definition of a Land Contract
A land contract refers to a type of mortgage or financing. It’s usually a contract that’s carried out between that of private parties. The aim is to pay for a property over several installments.
This is an ideal solution as opposed to an assumable mortgage loan. Thus, there are many valuable benefits when taking on a land contract. This includes receiving an equitable title when financing. An equitable title gives the buyer an interest in the property in question. This means they’re permitted to use possession of the property.
You may also find land contracts referred to as:
- Installment Contracts
- Agreements for Deeds
- Contracts for Deeds
The Benefits of Refinancing Land Contracts
For those looking for alternative financing, land contracts can seem a good idea. This is as opposed to mortgages or cash purchases.
A land contract offers increased maneuverability. That is if you’re okay with not having the title to your property straight away.
Refinancing a land contract can allow you to negotiate your contracts better. This includes aspects such as:
- The down payments
- The terms and conditions
- The interest
- How the interest will be paid off
So, if you can’t access traditional methods, refinancing is an option worth looking at further.
Refinancing Land Contracts as A Final Step
When it comes to refinancing land contracts, those with good credit won’t find this too much of a problem. Surprisingly enough, though, there is also more leeway for those with bad credit here as well.
This is because it’s considered easier to get finance on a land contract. Land contracts have no credit guidelines defined, as such. This means they don’t rely on the lending data used for mortgages.
Potential buyers looking towards mortgages will often have their applications turned down. This is due to many influential factors. Mortgages are usually sold when major points get taken into consideration beforehand. These often relate to the buyer beforehand. These include DTI, which is the debt-to-income of the buyer, plus their credit score.
Thus, for those with a low credit score, the possibilities of being offered a mortgage are low. That’s why land contracts make more sense. They’re also usually favored when all other avenues have been exhausted.
Understanding the Crucial Elements of Refinancing Land Contracts
For someone with a bad credit rating, discovering that there is, in fact, a way to buy property is appealing. But, getting into a land contract needs a thorough understanding of the implications.
Though land contracts offer a form of flexibility, they do also come with their own set of drawbacks. To remain financially savvy, it’s worth looking out for areas here including:
The terms offered by your land contract:
It’s crucial that the terms of the agreement in a land contract are clear and accessible. The best payment terms here include a fixed-rate payable for the duration of the entire loan. These are the more straightforward and clearer cut for all to understand and abide by.
Yet, a large number of loans here offer fixed payments. Ultimately these lead up to a large final payment at the end of the loan. This means a huge part of the loan becomes payable in one go
The protection offered by your land contract:
Unfortunately, unlike mortgages, most land contracts don’t have as many basic protections. This is usually to do with the seller holding the title until full payment’s made.
Problems can arise here if you fail to make a payment on time and find yourself in a position of eviction. This is often due to how your contract’s worded. Those with mortgages won’t find this the case as their name is usually on the title.
Besides this, seller error possibilities aren’t far from the surface with land contracts. Thus, should the seller not keep up with their property taxes, the risk of losing is high. Or, should they die during the course of the contract, losing the property is greater. This is all because the property will not be yours until you get your name written on the title.
The interest rates offered by your land contract:
Finally, most land contracts attract a higher interest rate. This is especially so when you consider them against the mortgage interest rates found.
Though this higher rate is understandable, it does mean increased layout. The seller is taking a risk, particularly for those with bad credit, so they need cover themselves.
When combining such elements, you may well be facing the prospect of getting into more debt. Should you then decide to refinance your land contract, increasing bad credit will make it all the harder to do so.
How to Go About Refinancing
Once you’re aware of the implications of taking on refinancing for a land contract, you can get started.
If you’ve done your homework and exhausted all over avenues, refinancing may be the only means open to you. But, if you have a bad credit rating already, it pays to be financially savvy and aware before making your next move.
There are several steps to getting land contract refinance with a bad credit rating. These include showing a commitment to making payment on time. It also means working with lenders who offer traditional lending and portfolio loans. There are also other steps involved to ensure your refinancing is a success:
Make all your payments on time
One of the most important aspects of successful refinancing is good payment history. Financial experts recommend ensuring you have no late payments throughout 12 months minimum.
For some, even just one late payment results in an instant denial. For others, it can mean requiring more equity before re-considering.
For some people, bad credit doesn’t always occur through late payments or missed payments. So, it’s good to prove you’re making a concentrated effort and show an ability to pay regularly. This will work to your advantage.
Choose lenders offering both traditional lending and portfolio loans
To increase your success when it comes to refinancing time, it’s important to reflect on lender choice. Consider one offering traditional lending and portfolio loans. This means you increase your chances of eligibility.
You may think that by the time it comes to refinancing, you’ll be eligible for traditional financing? If you’re unaware of the strict requests of mortgage approvals for bad credit clients, you may come unstuck with their refusal.
By selecting those lenders that offer portfolio loans, you get more scope at this stage. This is without having to start from scratch again with a new lender. It also means you won’t have to apply for yet another appraisal.
Have your land contract legally recorded
If you find that your land contract wasn’t recorded with the county when you purchased it, get this done straight away.
This is a relatively easy and inexpensive act and one that is simple to perform. Though it’s preferable when the land contract was originally executed, it can also be done soon after.
Record all your transactions
One of the best pieces of advice here is to avoid at all costs paying land contracts using cash.
Cash is not easy to keep track of when it comes to exchanging purposes. Thus, you do not help your bad credit situation, and there are no records of regular, timely payments at your end.
The ability to track and verify payments throughout the refinancing process is key.
Final Thoughts on Refinancing Land Contract with Bad Credit
In concluding, refinancing land contracts aren’t as hard as you may think. Obviously, if you have bad credit behind you, it may be more challenging and requires more effort and planning. But it can be done.
The solution here is to show a potential lender that you’re willing to make important payments on time. Also, to commit and work to the terms initially agreed.
Furthermore, if you can refinance land contracts with bad credit, you begin to rebuild your credit rating one again.