In Indiana, Sidelined Borrowers Turn to High-Risk Mortgage Alternatives

Over the last twenty years, there’s been a shift in home financing in Indiana. Tens of thousands of deed seekers have bought properties on installment contracts.

Also called land contracts or contracts for deed, these alternative financing agreements can make a home purchase possible for those who cannot get financing from a standard mortgage lender.

Typically, the seller requires a down payment, then finances the remaining balance. This arrangement can open a way forward for people with nontraditional incomes, those who have limited savings for money down, or those struggling with credit. Some of the buyers are just looking for small mortgages, but can’t get them. Some want to buy manufactured homes and can’t get loans for them.

What’s happening in Indiana? It’s a sign of the times. Far too many people are being sidelined from mainstream financing. They’re on the lookout for workarounds, of course.

What’s the Risk Factor?

Depending on the state where you’re buying, a contract for deed could have various levels of risk.

First, a contract for deed is meant to be paid off quickly—in a matter of years, not decades. So while it may be easy to get into these contracts, paying them off and getting out of them can be a high-stress affair.

In many places, going into default is much worse with the contract for deed. Traditional mortgage foreclosures give a deed holder time. But installment borrowers are seen in many courts as more like renters than owners.

Instead of foreclosure, a contract for deed may require a forfeiture. That is, the buyers can lose their entire investment in the home.

Who paid taxes and insurance under the contract? Who paid for maintenance and yard care? Chances are, the home buyer paid for much of the above, in addition to making loan repayments before sliding into default. Will the borrower forfeit all? It can happen. And note that the buyer doesn’t get the deed until the end of the term. The buyer holds what is known as equitable title during the course of the loan. But the seller can make decisions that cloud the title. If the seller doesn’t pay a debt, get a permit, or win a court case, those clouds can be heavy liens and penalties.

Buyers should come into this type of bargain knowing just how much risk they can reasonably take on. And they should check state law, so they can recognize unlawful contract terms.

A buyer needs to know what’s in the title records. Title companies can check for claims (such as municipal liens).

Why Would a Buyer Take This Risk?

Lenders and mortgage companies can be too strict for, say, a contract worker or an entrepreneur. When someone has their heart set on a deed, but gets rejected by lenders, they rarely want to give up on their goal. Especially if they’re aware of alternative ways to reach that goal. And here at Deeds.com, we understand.

This is why contracts for deed, otherwise known as installment contracts, continually attract buyers. A frustrated buyer could get around the mortgage hurdle by finding a seller willing to offer an Installment Contract for Sale of Real Estate—in Indiana, or wherever they might buy.

In contrast with rent, installment payments become home equity. And while the interest is higher than it is in a 30-year mortgage, the contract buyer—if all goes well—stays in debt for a shorter period of time.

What’s Going on With Installment Contracts in Indiana?

In Indiana, these land contracts are not uncommon at all. Some are marketed to households in Hispanic communities; many turn up in relatively low-priced transactions.

Installment purchases regularly show up in towns and cities, rural areas, and in manufactured housing developments. Large numbers of land contracts exist in and around Indianapolis, Fort Wayne, and in the outskirts of Chicago. Even more are further afield. More than four in every hundred purchasers have turned to installment contracts in Jennings, Howard, Elkhart, and Washington Counties.

What do these buyers all have in common? Usually, they seek affordability that isn’t available to them with standard financing. Lenders just don’t offer many small mortgage options—loans for homes with low prices. Over the past two decades, the price of the typical home bought on an installment basis, adjusted for inflation, is just over $120K. That’s much lower than the typical Indiana home purchase price.

That said, big businesses can be involved in installment contracts. Corporate sellers have issued close to a third of Indiana’s total number of installment contracts. That’s about parallel to the portion of corporate sellers involved in Indiana home sales across the board.

Those who buy through land contracts pay interest rates that hover around 1% more than the interest paid on a standard mortgage. The reason buyers still associate them with affordability? It’s their lower barrier to entry into the real estate market. Consider that most installment contract buyers put less than 5% down on their homes.

Does Indiana Regulate Installment Purchases?

The answer is yes. But in a patchy way. See the First Lien Mortgage Lending Act and the Home Loan Practices Act for the details.

In general:

• There’s a title disclosure rule. The seller in a contract for deed must disclose clouds on the title—tax liens, legal judgments, and so on—within 10 days of forming a contract.

• Early payments from the buyer can’t be penalized.  

On the other side of the coin:

• Land contracts can legally go unrecorded.

• There’s no interest rate cap. An Indiana contract for deed can have any interest rate, terms, or fees.

Since 1973, judge-made law has treated installment contracts like mortgages. This means the buyer gets a foreclosure process. This means more time to catch up on missed payments, and the ability to keep home equity (rather than forfeiting it to the seller).

But the Pew Charitable Trust points out that Indiana never put that 1973 decision into the state legal code. So…

It’s not uncommon to see installment contracts that only allow foreclosure safeguards once the buyer has paid off some percentage of the home price. And some of these contracts say most of the balance must be paid to enable the borrower to benefit from the legal foreclosure process. Risky? Absolutely.

Important notes: A buyer should have a legal professional review the parties’ contract for deed. Purchasers who sign unfair and unlawful contracts can seek help by calling local law enforcement and the attorney general’s office for their state.