How to Refinance a Land Contract to a Conventional Home Loan

Switching to a conventional mortgage might get you a better deal on a house.
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Real estate law has a wide variety of instruments that buyers and sellers can use in transferring ownership of a home. In a traditional financed home sale, the buyer pays the purchase price up front with the help of a mortgage to get the deed to the house. Land contracts provide a way for the buyer and seller to spread payments out over time without a bank. This type of arrangement carries some risk, but some buyers might be able to fulfill the land contract early with a conventional home loan.

Improve Your Credit

You might arrange a land contract with the seller if you’re not able to qualify for a conventional mortgage. Mortgage lenders often look to your FICO credit score to decide whether to approve your loan application. Paying down your debts and paying on time are two powerful ways to improve your credit. Some lenders might consider your payment history on the land contract along with your reported credit history. You might be able to bring your credit score into a range with which lenders are comfortable.

Fix Any Home Issues

Traditional lenders use the house as collateral in case you default on your loan, and they want to be sure that they could easily sell the home for enough to cover their costs if necessary. Some lenders will refuse to finance a home that has significant defects -- such as structural problems -- or a title with a lien against it. Bringing the home up to the bank's standards not only improves your chances of securing a conventional home loan but also improves the value of the home.

Contact a Lender

Speak with a mortgage officer at a local bank to investigate whether you and the home would qualify for a traditional mortgage. Depending on how long you’ve been in the land contract, the process will be similar to either a purchase or a no-cash out refinance. In addition to the usual criteria, such as loan-to-value ratio and credit score, the bank will also need to review the land contract and a payoff letter to ensure there will be no problem obtaining a clear title from the seller.

Rent to Own

Occasionally, homes are made available on a rent-to-own basis. The seller might use a land contract for a rent-to-own home, which might leave you responsible for finding a mortgage by the end of the contract. A typical rent-to-own arrangement stipulates that you take responsibility for the home’s expenses and that the seller will credit a portion of your rent as a down payment to buy the house at an agreed upon price. If the market conditions change or your credit improves during the period of the rent-to-own contract, you might be able to get a better deal by buying out of your agreement with a conventional home loan rather than fulfilling the contract.

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