Did you ever want to buy a home, only to find out that it’s just out of price range? Homeownership is not always accessible these days, which is why people are starting to take a look at other ways to get the house they want. If this sounds like your situation, you might have heard the term “contract for deed.”
A contract for deed is becoming one of the more popular paths to homeownership in the United States. In many cases, this path can give you a way to afford a home that otherwise would be out of reach without a hefty down payment. Want to know more about this home-buying method? Here’s our contract for deed guide!
What Is A Contract For Deed?
A contract for deed is an alternative form of seller financing. With this route, a buyer will purchase a property at closing without any down payment. However, they will be expected to make mortgage payments directly to the seller each month instead of a mortgage company.
A contract for deed is a faster way to get a house sold, which is great if you’re on a timeline. It’s also a good way to avoid higher closing fees. However, there’s a lot of details that need to be explained before you jump on this opportunity.
How Does A Contract For Deed Work?
This type of financing involves a contract that delineates how payments will work. There’s no upfront cost, but the seller will get monthly payments for a set period of time. The buyer will not get the deed to the house at closing.
The payments are expected to continue on a monthly basis. After a declared period of time, the buyer is then expected to pay the rest in a large lump sum—or to go through a traditional mortgage. Once the house is entirely paid off, the buyer gets the deed.
Contract For Deed Interest Rates
The terms in a contract for deed will almost always include an interest payment. While the exact amount is negotiable between the buyer and seller, in most cases, the interest rates associated with a contract for deed will be quite a bit higher than a traditional mortgage loan, often as much as 3-6% higher.
How Is A Contract For Deed Different Than Traditional Buying?
There are four main ways that a contract for deed tends to differ from the standard bank financing route. These are:
- There’s no down payment upfront- If you don’t have 10 to 15 percent to put down for a house, this may be a better option.
- You might be able to avoid working with banks altogether- Banks and lending companies often make it challenging to qualify for funding. A contract for deed allows you to bypass that—at least for the time being.
- You do not get the deed at closing- Technically, you don’t get the rights to the house at closing. It only happens when you have paid off your home.
- Each contract for deed has to be individually discussed- The terms for a contract for deed have to be discussed and negotiated with the seller directly. There are no uniform terms here.
What Are The Disadvantages Of A Contract For Deed?
It may sound like a contract for deed should be a go-to for everyone, but it’s not the miracle cure that people expect it to be. It’s actually a financing option that has some serious disadvantages. The most notable ones include:
- You will have to find a seller who’s amenable to it. This is the hardest part of the transaction. Most sellers will not want to deal with people who have alternative financing forms as an option. Since it’s a rare find, you have limited buying opportunities.
- The terms may require you to pay a large lump sum, which could put you at the mercy of banks later on. Though this isn’t always true, the vast majority of agreements require you to pay the rest of the house within several year’s time. On average, buyers have to pay the rest off in five years. If you can’t amass that money, lenders will be your only choice.
- You have to negotiate the contract for deed with the seller. This is one of the most challenging parts of the contract for deed. You need to be good at negotiations to make it work in your favor.
- The seller can immediately foreclose on your property if you are late with one payment. There’s no recourse or way to avoid the foreclosure if this happens.
- You might not get a clean title. Most states don’t have requirements on whether a title has to be clean with a contract for deed agreement. Let the buyer beware!
- Terminating the contract can be difficult. There are many cases where a buyer wanted to change contract terms, only to have it end up in court.
- Interest rates are higher than traditional loans. A contract for deed will usually carry an interest rate that is higher than a traditional mortgage.
Termination Of Contract For Deed
When it comes to canceling a contract for deed, the seller has the advantage. Most states will allow an instant cancel if a buyer’s check bounces. All they have to do is fill out a Cancellation of Contract for Deed form and have it served to the buyer.
If you’re a buyer who wants to cancel the contract, things get dicey. Not all states allow it. To have a buyer cancellation, you have to have a legitimate, state-approved reason. Depending on the state, you may also need to go to court to prove your point.
Additionally, most situations that involve a contract for deed cancellation or termination will require the help of an attorney. So, if you want to get out of this contract, you should be prepared for a lot of court fees.
Is A Contract For Deed Right For You?
If you are going to opt for a contract for deed, it’s a gambit. On the one hand, you could have a very amenable agreement that gets pushed through easily and gives you the payment terms you want. On the other hand, it could cause an instant foreclosure, and the deed you get might not be clean.
If you decide to go this route, it’s a good idea to research your options heavily and have the contract looked over by an attorney. Due diligence is what makes or breaks a contract for deed, after all.