A land contract is a great tool to use to acquire a property, and take ownership of a home without dealing with banks and lenders.
With a land contract, the seller acts as the lender, and provides “seller financing” essentially.
But what if you have been in the land contract for a while, and are looking to tap into the equity of the home?
Here we’ll cover everything you need to know about tapping into your home’s equity and getting a cash out refinance on a land contract.
Can you do a cash out refinance on a land contract?
The answer: yes, if you can meet some very specific guidelines.
The vast majority of lenders will tell you flat out that taking cash out on a land contract is impossible. I thought that was the case too, until I thoroughly read the HUD handbook. Nowhere does it state that cash out is not allowed on a land contract refinance.
The truth is lenders have overlays on their guidelines, and make a business decision to not allow cash out on a land contract. But it is certainly possible on an FHA loan.
Here are the things you need to do in order to set yourself up to successfully complete a cash out refinance on a land contract:
The land contract must be recorded
When purchasing a home on land contract, the local municipality (county, city, or township) needs to receive and record the contract or memorandum to make it “official” and on file.
If it is not recorded for at least 12 months, it’s not going to work.
You must have good payment history on the land contract
The lender is going to want proof that you have not had any 30 day late mortgage payments in the last 12 months. This will either be verified by getting 12 months cancelled checks from you, 12 months bank statements from you, or a written verification of mortgage from the land contract holder.
620 Credit Score
There are no lenders that I am aware of that are allowing cash out refinance on land contract below 620 credit score.
Be within FHA county loan limits
There is no max income limit on FHA, but there are max loan limits on FHA loans. Check your county loan limit to make sure you’re within what is required.
Work with a loan officer who is highly experienced with land contracts
If you talk to 10 loan officers, 7 of them probably have never done a land contract refinance in their career. You don’t want to be the guinea pig. It is in your best interest to work with someone who has extensive experience with land contract refinances.
Other things to keep in mind when doing a cash out refinance on a land contract
Property condition
The home needs to be in livable condition. Any sign of mold, holes in walls, broken windows, peeling paint, etc., will likely be flagged by the appraiser as needing to be repaired prior to closing.
One of the main things they’re looking for are any safety hazards. Any missing rails in stairways will need to be addressed.
Debt-to-income ratio
Typically with an FHA loan, the absolute max debt-to-income ratio allowed is 57%. But to be safe, the target would be 50% debt-to-income ratio. That means your total monthly debt needs to be about half of what your gross monthly income is.
Employment/Income
You’ll want to be able to show consistency and stability as it relates to your employment and income situation.
Typically that means you’ll need to show a strong 2 year recent history. If you were in school, you’ll need to show school transcripts. If there was a gap in employment, you’ll need to provide a letter as to the reason for the gap.
Assets
You aren’t necessarily required to have a substantial amount set aside in the bank. However, showing reserves does help strengthen the file. If you can show 3-6 months reserves (savings, 401K, etc.) that will only help your chances of success.
In Summary
Getting a cash out refinance completed on a land contract requires a paper trail. It does take a little more work than a standard refinance. So it really depends on what you’re looking to accomplish.
- Land contract must be recorded for at least 12 months
- Minimum 620 credit score if doing cash out on land contract
- Must have on time payment history over the most recent 12 months
Just because you have been told by a big lender that you’re not eligible doesn’t mean there aren’t other options worth looking into. It may just be that they have an overlay that doesn’t allow them to do a cash out refinance on a land contract.
I invite you to reach out.
Get your questions answered.
We have been able to get many borrowers approved all over the country who have been told by other lenders they’re not eligible.
If there is a way to get it done, we’ll find it. And if we can’t, we’ll give you the guidance you need to set you up for success in the future.
