Looking to buy a home but worried about getting for a mortgage? Even though most people think they need a 20% down payment plus a loan from a bank, there are methods available to finance a home purchase.
Work with a real estate agent who can help you narrow your options and find you a home that matches your needs. One route home buyers use is a contract for deed.
Here’s why you should look into a contract for deed to buy a home.
What is a contract for deed?
A contract for deed is the sale of property in which the seller finances the purchase of their property to a new owner. They can require a down payment from the buyer and agree to apply monthly payments to the balance of the loan like a standard mortgage.
The buyer can pay the purchase price in monthly installments, or a portion of their monthly payment is put towards the purchase price. Sometimes the entire purchase price is due at the contract’s end, called a balloon payment.
Is a contract for deed a good idea?
A contract for deed can be a great idea for a home buyer who’s had difficulty buying their first home, or for a seller looking for a fast close. Buyers who’ve had their loan applications rejected by a bank can often use a contract for deed to buy a home. Or, they can use it if they just want a quick close.
Sellers can work with a contract for deed buyer to close quickly or sell a home that’s been sitting on the market. A contract for deed provides an option that can perfectly suit some home buying and selling situations, but you should talk with your realtor to decide if it’s right with you.
When would a buyer need to use a contract for deed?
A buyer might use a contract for deed if they couldn’t qualify for a mortgage due to poor credit. They also might need to use one if they don’t have enough for a typical down payment.
What are the disadvantages of a contract for deed?
Buyers still have to put down money when buying a house under a contract for deed, they just may not have enough for a traditional mortgage. That money is forfeited if you default on the contract. A seller can immediately foreclose if you miss a payment, there’s no grace period, and you’ll now have a foreclosure on your record.
The disadvantage to a seller is that, if a buyer does default, it can be costly to have the title cleared. It will take some time, too, and you can’t re-sell the home while the title isn’t clear. There are far more risks and hassle than in a traditional home sale.
For a buyer, use a mortgage payment calculator and ensure you can truly afford the home before you enter into a contract for deed. Defaulting could put you further behind on your road to homeownership.
How long does a contract for deed last?
Because it’s a form of seller financing, the terms of a contract for deed is up to the buyer and seller. You can mutually agree on a term; however, the typical length is three to five years. Most sellers don’t want to function as a bank for an extended period.
At the end of the term, the contract for deed comes due in a balloon payment. When entering into a contract for deed, the buyer is betting that they’ll have cleaned up their credit or fixed the issues that stood in the way of obtaining traditional financing and be able to pay off the contract for deed with a conventional mortgage. If you’re unsure what you might need to do to fix your credit or qualify, get some advice from your real estate agent.
Does a contract for deed need to be recorded?
Yes, a contract for deed should be recorded. It functions as a private mortgage between the home’s seller and the buyer and, as such, is a lien against the property. The contract for deed must be recorded with the county, state, or municipality to be valid.
If you have concerns that the owner hasn’t recorded the agreement, ask your realtor to check the property records. You have no legal hold on the property if it hasn’t been recorded.
Is a contract for deed the same as a lease to own?
No, a contract for deed isn’t the same as a lease-to-own. Under a lease-to-own agreement, the lease gives you an option to purchase the property at the end of the lease’s term, typically for an agreed-upon price. But you have no legal title to the property during the lease’s term.
With a contract for deed, a purchase agreement is executed, there is a closing, and there is a legal claim on the house.
Using a contract for deed to buy a house can be a great idea if you’ve struggled to qualify for a traditional mortgage, but there are some additional pitfalls. A Clever Partner Agent can help buyers struggling to understand this complex process. Buyers in 40 states might qualify for a Home Buyer Rebate when working with an agent in the Clever Partner Network, which could help them cover closing costs!
To learn more, reach out to be put in touch with a Clever Partner Agent today.