Key Takeaways
How the two instruments differ on title, default and availability, and why the buyer protections you read about often do not reach vacant land.
- A mortgage gives you legal title on day one. A land contract gives you possession and equitable title, with the deed held back until payoff.
- On default a mortgage runs through foreclosure. A land contract usually runs through forfeiture, which is faster and harder on the buyer.
- Several state land contract protection statutes are written around a dwelling, so a bare land buyer may fall outside them entirely.
- Banks avoid raw land partly because federal guidelines cap raw land lending at 65 percent loan-to-value against 85 percent on improved property.
- A promissory note with a deed of trust gives the buyer title at closing while the seller keeps a recorded lien, which is usually the better structure for both.
If you are buying or selling land on payments, the first decision is which instrument carries the deal. Land contract vs mortgage is not really a question about interest rates. It is a question about who holds the deed while the money is still owed, and what each side can do when a payment is missed.
The comparison also tilts differently on vacant ground than it does on a house, for reasons that are written into federal lending guidance. Our guide to owner financing on land covers the concept in full; this page is about choosing between the two instruments.
Quick verdict: a mortgage is the stronger position when you can get one, because you own the property from closing and default runs through a formal process. On raw land you often cannot get one, so the real choice is between a land contract and a seller-financed note with a deed of trust. In most cases the note and deed of trust is the better version of the same deal, and it is worth asking for before you sign a contract for deed. This is general information, not legal advice.
What Is the Difference Between a Land Contract and a Mortgage?
One instrument keeps the deed with the seller. The other moves it to the buyer and secures the debt with a lien.
A land contract, also called a contract for deed or an installment land contract, is a seller-financed sale. The buyer takes possession and pays the seller directly, and the seller keeps legal title as security until the balance is cleared. A mortgage is a loan: the buyer receives the deed at closing and the lender records a lien against the property.
| Land contract | Mortgage | |
| Who finances | The seller | A bank or lender |
| Legal title while paying | Seller | Buyer |
| Buyer holds | Equitable title and possession | Legal title, subject to a lien |
| Underwriting | Negotiated, often no credit check | Credit, income and appraisal |
| Where the terms come from | Agreed between the parties, with the IRS applicable federal rate as the floor on interest | Set by the lender against market pricing and your credit |
| On default | Forfeiture or cancellation | Foreclosure |
| Statutory buyer protections | Often written around a dwelling, so bare land may sit outside them | Foreclosure law applies to the property either way |
| Realistic on raw land | Yes | Rarely |
The two figures buyers usually ask about next are the deposit and the rate. Both are negotiated rather than standard, and our page on the land contract down payment sets out what actually drives the number.
Who Holds Title, and Why Does That Matter?
Title is the whole difference, and it decides everything downstream.
Under a mortgage you are the owner from closing. You can sell, borrow against your equity, and defend your position in court, and the lender’s remedy is limited to enforcing its lien. Under a land contract you have the right to obtain ownership once you have paid, but the deed stays with the seller, so you depend on that seller still being able to convey clean title years later.
That dependency is the risk most articles skate past. If the seller takes out a loan against the property, dies, divorces, or has a judgment recorded against them while you are still paying, your equitable interest has to survive it.
Ohio is a useful illustration because it legislated the point. Ohio Rev. Code 5313.02 lists sixteen provisions a land installment contract must contain, including a statement of any encumbrances against the property, a requirement that the buyer pay taxes and assessments from the date of the contract unless agreed otherwise, and a rule that the seller may not place a mortgage on the property for more than the balance still owed on the contract without the buyer’s consent. It also requires the seller to record the contract within twenty days.
Recording is the practical lesson wherever you are. An unrecorded land contract leaves your interest invisible to everyone searching the title.
What Happens If You Stop Paying?
A mortgage default runs through foreclosure. A land contract default usually runs through forfeiture, and forfeiture is the harsher road.
Foreclosure is a court-supervised process with notice, a chance to cure, and a sale in which any surplus above the debt belongs to the borrower. Forfeiture cancels the contract, returns possession to the seller, and depending on the state and the contract terms can leave the buyer with nothing to show for the payments already made.
Michigan, the largest land contract market in the country, publishes the sequence plainly through its housing development authority:
- The buyer defaults and the seller serves written notice of forfeiture
- The buyer has 15 days to cure
- If the default is not cured, the seller files a complaint for possession
- The court sets a hearing within 30 days
- If the judge finds the buyer in default, judgment of possession is granted
- The buyer then has 90 days to redeem if less than 50 percent of the purchase price has been paid, or 6 months if 50 percent or more has been paid
Michigan also bars the seller from accelerating the whole balance as part of a forfeiture, and the land contract forfeiture timeline sets out each step. Note how much faster that is than a foreclosure, and how much of it turns on a percentage rather than on fairness.
Do Land Contract Protections Cover Vacant Land?
Often not, and this is the part almost nobody writes down.
The reassuring line in most land contract articles is that states have added foreclosure-style protections once a buyer has paid a set share of the price. That is accurate for houses. Read the statutes and you find the protection is frequently defined around a dwelling.
Ohio. Ohio Rev. Code 5313.01 defines “property” for the entire Land Installment Contracts chapter as real property “improved by virtue of a dwelling having been erected on the real property.” Everything that follows, including the rule in 5313.07 that a seller may recover possession only through foreclosure and judicial sale once the buyer has paid for five years or reached twenty percent of the price, hangs on that definition.
Texas. Texas Property Code 5.062(a) states that the executory contract subchapter “applies only to a transaction involving an executory contract for conveyance of real property used or to be used as the purchaser’s residence.”
Federal. The Consumer Financial Protection Bureau’s advisory opinion of 13 August 2024 addresses transactions in which a consumer buys a home under a contract for deed. Regulation Z is built around credit secured by a dwelling.
Michigan runs the other way, which is worth saying because it shows this is a drafting choice rather than a rule of nature. Its forfeiture statute reaches any executory contract for the purchase of premises and does not carve out bare ground.
None of this makes a land contract on vacant land unlawful or unwise. It means the safety net you assume is underneath you may not be, so confirm with a local real estate attorney whether your state’s statute reaches a parcel with nothing built on it. This is general information and not legal advice.
Why Is a Mortgage So Hard to Get on Raw Land?
Because federal supervisory guidance treats bare ground as the riskiest category of real estate collateral, and lenders price and ration accordingly.
The Interagency Guidelines for Real Estate Lending Policies set supervisory loan-to-value limits by category: 65 percent for raw land, 75 percent for land development, 85 percent for improved property. A regulated lender working to that guideline is looking for 35 percent down on a bare parcel before anything else is discussed.
That single number explains most of what land buyers experience. Fewer institutions offer the product, the down payment is larger, and the terms are shorter. It is also why seller financing is not a fringe option on land the way it is on housing. It is frequently the only structure available, which changes the comparison from “which is better” to “which of these is actually on the table.”
When Does a Land Contract Make Sense?
When the alternative is no transaction at all, and when both sides understand what they are trading.
It makes sense for a buyer who cannot qualify or does not want to, who wants a fast close with few parties involved, and who accepts weaker protection in exchange for access. It makes sense for a seller who wants monthly income, a wider pool of buyers, and the ability to spread gain through the installment sale method rather than taking it all in one year.
What both sides should settle before signing is the rate, because it is negotiated rather than published and the IRS applicable federal rate sets the legal floor. Our page on owner financing interest rates covers how to land on a defensible number.
Then run the arithmetic before you argue about terms. The owner financing land calculator shows what a given price, deposit, rate and term actually produce as a monthly payment and a balloon, which is usually where the negotiation resolves itself.
Is a Note and Deed of Trust Better Than Either?
For most land deals, yes, and it is the recommendation this page would make if you only read one section.
Under a promissory note secured by a deed of trust or a purchase money mortgage, the seller deeds the property to the buyer at closing and records a lien for the unpaid balance. The buyer owns the land from day one exactly as with a bank loan. The seller holds security exactly as a bank would, and enforces it through the same foreclosure machinery.
That structure gives the buyer the ownership position of a mortgage and the seller the accessibility of owner financing, which is why many attorneys now steer clients toward it over a contract for deed. It also sidesteps the dwelling question above, because foreclosure law applies to the property regardless of what is standing on it.
Which instrument is available and customary still depends on your state, and a few states regulate contracts for deed heavily. Have a local real estate attorney structure the deal and use the right form. Our guide to write a land contract covers what the document has to contain either way.
Who Should Choose Which?
Match the instrument to your position rather than to a general preference.
Choose a mortgage if you can qualify and a lender will write it on the property. You get title, equity and a formal default process, usually at a lower rate.
Choose a note and deed of trust if you are buying on terms from the seller and either side has a choice about structure. It is the closest thing to a mortgage that does not require a bank.
Choose a land contract if that is the only structure the seller will do and the numbers work. Record it, check whether your state’s protection statute reaches the parcel, and have an attorney read it first.
Choose neither if the payments do not work or the title cannot be cleared. No structure fixes a deal that does not pencil, and walking away is a legitimate outcome. If you want to see what land is actually trading at on terms before you commit to any of this, the vacant land for sale listings show asking prices and acreage by state.
Structure the Deal Before You Sign It
The instrument matters more than the rate. A percentage point costs you money; the wrong structure can cost you the property.
Get the structure right first. Create a free account and work the numbers before you commit to a form.
Frequently Asked Questions
Is a land contract the same as a mortgage?
No. With a mortgage a lender advances the money, you receive legal title at closing, and the lender records a lien. With a land contract the seller finances the purchase and keeps legal title until the final payment, while you hold equitable title and possession. Both let you pay over time, but ownership and default remedies are entirely different.
Which is better for buying vacant land?
For raw land the practical answer is usually seller financing, because federal guidance caps raw land lending at 65 percent loan-to-value and many banks decline the product outright. A mortgage is the stronger instrument when one is available. The best middle ground is a seller-financed note with a deed of trust, which gives you title at closing.
Do you actually own the property under a land contract?
You have possession and equitable title, meaning the right to obtain ownership once the contract is paid. The seller keeps legal title and the deed until then. Record the contract where your state allows it and confirm the seller can convey clean title, because your interest depends on their position staying sound throughout the payment period.
What happens if you miss a payment on a land contract?
Usually forfeiture. In Michigan the seller serves notice, the buyer has 15 days to cure, and after a judgment of possession the buyer has 90 days to redeem if less than half the price is paid or 6 months if more. State rules vary widely, so read your contract’s default clause and your state’s statute before you sign.
Do state land contract protections apply to vacant land?
Sometimes not. Ohio’s Land Installment Contracts chapter defines the property it covers as land improved by a dwelling, and Texas limits its executory contract rules to property used as the purchaser’s residence. Michigan’s forfeiture statute has no such limit. Confirm with a local attorney whether your state’s protections reach a bare parcel.
Resources and Further Reading
- Ohio Rev. Code 5313.01, Land Installment Contract Definitions defines the property the chapter covers as real property improved by a dwelling erected on it.
- Texas Property Code 5.062, Applicability limits the executory contract subchapter to property used or to be used as the purchaser’s residence.
- Michigan State Housing Development Authority: Land Contract Forfeiture and Timeline sets out the notice, cure and redemption steps including the 90 day and 6 month windows.
- CFPB Advisory Opinion on Contracts for Deed, 13 August 2024 addresses consumers buying a home under a contract for deed and the Regulation Z protections that attach.
- Interagency Guidelines for Real Estate Lending Policies, 12 CFR Part 365 sets the supervisory loan-to-value limits, including 65 percent for raw land against 85 percent for improved property.
- Ohio State University Farm Office: What Is a Land Contract? explains land contracts for farmland owners, including the five year and twenty percent forfeiture rule.
