Land Contract: A Great Alternative When A Traditional Mortgage Isn't An Option

No one understands the current state of the U.S. housing market more than the citizens of California, Florida, Illinois, and Michigan. Recent statistics show that the combined foreclosures of these four states represent 52% of all foreclosures in the nation (Grand Rapids Press). Americans living in these states are experiencing a housing crisis like this country has never seen, primarily due to a combination of high-risk mortgages, negative equity, and unemployment. This perfect financial storm brooding over the U.S. economy has rained heartache and headache upon countless families over the past few years, and reaches far beyond the realm of only the fiscally irresponsible. I ought to know – I lost my own home to foreclosure in 2008.

When I got married in 2004 I moved to West Michigan with my husband, a first-time homeowner who had acquired a low-cost property and performed major renovations himself in order to keep a low monthly note and gain equity fast. By the time we were married he was enjoying the fruits of his labor and, as far as he knew, doing well. He was the first person in his immediate family to own a home with a 30-year mortgage. His father, a General Motors retiree, had always lived beneath his means so that he could pay cash for almost everything, including his home. The short-term mortgage that his father did have was paid off early, so loans were not his specialty. That’s why my husband had made a fatal mistake before we got married – he refinanced his home during the big predatory refinance boom.

Borrowing against the additional equity in his home, my husband refinanced with a low introductory interest rate on an adjustable rate mortgage (ARM) with an option to refinance again in two years. His plan was to refinance again in two years and acquire a fixed rate mortgage at as reasonable rate as he could get. The money he was able to pull out of the house was used to pay off bills and theoretically create a better financial situation for him and the family he hoped to build soon. With a degree in Business Finance, my husband was not a novice when it came to loans and how they worked. Unfortunately, caught up in all of the advertising and marketing hype of that time, he forgot that he did not have a crystal ball or a prophecy ensuring his financial security two years down the road. Like so many other borrowers in Michigan at that time, he allowed emotions and predatory lenders to convince him of future financial security that was not promised. Subsequently, the house of cards began to fall.

Soon after refinancing we were married and were blessed with our first child within a year. This addition coupled with disappointment in the lack of upward mobility at his job created a great strain on our finances because bills were growing but income was not. A few missteps with his credit plus a bursting housing market bubble and before we knew it, our chances of refinancing when we wanted to were ruined. We were stuck with the balloon payments and a monthly note that we could no longer afford. We succumbed to foreclosure in 2008 and had to move into an apartment that cost more per month in rent than my husband’s original mortgage payment.

The funny thing about it all was that my husband remained optimistic that something would work in our favor soon. While the media was predicting doom and gloom henceforth and forever because of the mortgage industry ‘crisis’, my husband had some foresight that would soon become a sigh of relief – but not without a little intermittent pain to endure. We had to live in a cramped duplex for a year with then three children (twins were born while we were going through the foreclosure process) and although our living space was nice, it was simply too small. However, after gaining a more solid foothold on our finances, with badly tarnished credit and a foreclosure to boot, my husband began looking for a new home to live in. He was able to sense what many economists could not – the changes in the housing market would cause other subsequent changes that would essentially benefit even buyers with bad credit. It was obvious that buyers with good credit would be able to scoop up great properties for pennies on the dollar because of the spike in foreclosures. However, what most market watchers did not predict was the need for property owners who wanted to sell to adapt in order to survive. In the states with the highest amount of foreclosures there are more properties than buyers, and seller who own their properties free and clear or who have good credit but own more property than they are willing to manage now find themselves needing to liquidate these assets without losing too much money.

In comes the land contract, here to save the day!

In his quest for a home to rent my husband found a nice homeowner who was eager to sell, and had no one to sell to. After a few honest, productive conversations, we found ourselves in a position to get a new home that was bigger and worth at least $50,000 more than the one we had lost, without having to rely on a bank for a mortgage loan. The seller was willing to make an arrangement where we could rent with an option to buy, with no interest added to the selling price of $107,245. The deal works well for both parties. The seller is an older man who can no longer maintain his properties the way he needs to. The house we now occupy needs a little maintenance and aesthetic work as well as a new roof in a couple years. So, the option consideration clause of the lease/purchase agreement that requires a non-refundable payment of $3,000 is absorbed by the repair allowance which totaled $7,250. This exchange empowered us to move into the home without paying the lofty contract fee; we maintain control over the repair costs and we will schedule for the renovation work that needs to be done. If for any reason we were to default on the agreement, the renovation that we perform adds equity to the home, not to mention the extra $750 per month the seller stands to make as long as we stay, putting him in a better position than when he entered into the contract. This causes his risk to be minimized and our benefit to be maximized, so long as we maintain our end of the agreement, which we have done and will continue to do. Without good credit and without the help of a lending institution, we have a better home to live in and are on the road to financial recovery.

Although this arrangement is not the conventional road to home ownership, in the State of Michigan, where unemployment is the highest in the nation at a rate of 15.1% (as of October 2009 - Bureau of Labor Statistics) and foreclosures are in the top five U.S. states for number of filings (RealtyTrac), it is a welcome alternative. Prospective buyers in similar positions may find that there are more flexible sellers and renters out there than they thought. It takes some struggle, some research, and some faith, but when the market changes this drastically, buyers can still find sellers who are willing to do what banks and economists thought was virtually impossible – adapt and accommodate.

--> CLICK HERE TO VOTE IN THE DEBT POLL <--

The Student Loan Dilemma

When I decided to go to college I knew that no matter where I went I was going to take out student loans. My parents didn’t have much money to pay for college and I had little to no savings for the occasion. Instead of thinking about money and how much the bill would add up, however, the school advisor was limited to helping me choose a school. After all, I was going to have a college degree in four years so what’s the difference how much my student loans added up to? While there are some kids that have a strong and dedicated desire to be something great like a doctor, lawyer, or dentist, most kids planning for college simply go to get a degree in whatever interests them by their junior year. If you plan on going to graduate school at a hard-to-get-into college then the undergraduate school may matter. If you are going to graduate with your bachelor’s and get a job, I’ve learned the institution really means nothing.

I chose to go away to school in upstate New York where most of my friends were going. I had no clue what I wanted to do but knew that I qualified to have just about everything paid for by my student loan. The majority of the loan was through a private bank while just a minute amount was funded through the government. An even smaller amount was given as a grant that I wouldn’t have to pay back. At 18 years old, I didn’t think twice. I packed up my belongings and headed off to what would become the best four years of my life.

After I graduated college, my loans totaled over $20,000. I slowly paid off the government loan which was around $3,000 and deferred payments on my private loan. Although the rate was pretty good at 4.41% I found it impossible to pay the $390.00 monthly payment with my newly acquired job. I applied for consolidations and was denied multiple times. Since the rate was good everyone I spoke to acted as though the $17,000 should be easy to get rid of. But I didn’t go to school to be a lawyer or doctor, I graduated with a degree in Psychology that I settled on after 3 years of trying to figure out what it was I wanted to do. In fact it seemed as though my college degree was more of a high school diploma and all the places I applied to could care less what I studied, only that I had the degree. Completing 4 years of college showed dedication and an aptitude for learning and that was all anyone seemed to worry about. My job was in sales and I had no idea how I was going to pay back the money I owed.

That was 8 years ago. Today my loan now totals over $19,000. The interest keeps building up and the payment remains at $390 a month, a nearly impossible amount for a person that makes $30,000 a year to afford. Now that I own a home I’m going to try the consolidation process again to see if that will help. After all, isn’t better for me to pay something rather than nothing? It would seem from the $2,000 in interest they’ve made that the answer to that is no.

While going away to college was a great experience, was it really worth the price of a new car? I could have easily got the same degree at a local community college for less than half the price and to be honest most employers could care less where the degree came from.

My answer to this dilemma is a big fat resounding yes.

While many kids may seem like they are just going to college for the sake of it, who are we to make that choice for them? I am happy I was given the chance to decide for myself and will do the same for my children someday. Limiting a child to a local community college when they have aspirations is like telling someone who wants to be a police office they can only be a security guard. Yes, many of them will fail and end up protecting the local mall anyway, but isn’t it worth it to give them a chance?

--> CLICK HERE TO VOTE IN THE DEBT POLL <--

Alternative Lending Sources

What is the proper measure for creditworthiness in this day and age?

Apparently, it is no longer simply the credit report or the verdict of one's local banking institution. There are so many individuals who fall short of traditional standards of creditworthiness that the marketplace has naturally made room for non-traditional lenders. Besides the controversial subprime mortgage lending industry that most people are by now familiar with, there is a increasung trend in person-to-person lending organizations. Websites like Prosper.com facilitate lending transactions between individuals and other single or small group benefactors. Using such a service empowers people who may not otherwise receive loan funding to finance their dreams and goals.

I am still not sure how I feel about the rise in alternative lending resources. At first glance it looks great; power to the people, right? There is no reason why deserving people should have to remain at the mercy of the big bad traditional financial institutions, right? I'm not so sure that pumping more loans into the pipeline is the answer. Then again, I am one of the few who believes that people should begin to move away from financing instead of toward it. If enough people renounced the borrowing lifestyle and stopped applying for loans, the market would respond with more competetive rates and terms. Then we wouldn't need many of these alternative lending options.

Wouldn't that be something?

--> CLICK HERE TO VOTE IN THE DEBT POLL <--