How Does a Contract for Deed Work?
With a contract for deed, the buyer makes monthly payments to the seller until the full amount owed is paid off. While the buyer is paying off the balance, the title is retained by the seller. Once the balance is paid in full, the buyer can have the deed recorded and then receive the title as they would with a more traditional sale.
Sometimes, a contract for deed will allow the buyer to make monthly payments until the whole mortgage is paid off. However, there are also instances where the buyer can make payments for a set amount of time before making a single, large payment to pay off the rest of the mortgage. Typically speaking, contract for deed agreements are significantly shorter than a traditional mortgage, ranging from about five to seven years on average.
Contract for Deed Pros
1. Easier to Purchase a Home
The primary advantage of a contract for deed is the option to buy a home without being in a great financial situation. Buyers don’t have to put down a large downpayment to start. Which means they don’t need tens of thousands in cash floating around. They also favor buyers with slightly worse credit since you don’t need to jump through the same hoops required to qualify for traditional financing options.
2. Fast
A contract for deed is also a relatively quick process when compared to trying to buy a home the conventional way. If you need to make a purchase quickly, this could be an option to consider. To put it simply, a contract for deed is a good way to forge a more straightforward path to becoming a homeowner. If you don’t have significant savings, great credit, or a lenient timeline, consider a contract for deed.
Contract for Deed Cons
1. High-Interest Rates
However, there are also several disadvantages that need to be considered. For one, sellers can charge much higher interest rates than mortgage companies because of the lower credit requirements. For another, defaulting isn’t really an option with a contract for deed. Of course, it’s not necessarily an “option” with traditional mortgages either, but if you default with a contract for the deed, you don’t have six months to fix the situation. If you do default, the seller can serve a notice that gives the buyer only 60 days to pay what they owe and also pay any attorney’s fees to reinstate the contract.
2. Risk For Issues With the Property
When you enter into a contract for deed, the guidelines for the sale are also more lenient for the seller. This means that the quality of the property could be much lower, and repairs may not have been made as diligently as with a conventional sale process. However, the buyer is still on the hook and liable to deal with repairs that may come up. So, if the house is in bad repair, you could end up with a hole burned in your wallet dealing with the fixes.
3. Balloon Payments
Lastly, many buyers run into issues when it comes time to make the final large payment in order to get the title to the home. These are known as balloon payments. It’s common for this payment to be so hefty that the buyer needs to take out a traditional mortgage to cover it. If the buyer isn’t able to qualify for a mortgage when the time comes to make their balloon payment, they could end up in hot water.
How To Do a Contract for Deed
A contract for deed is still considered a mortgage. Even though the agreement is not with a traditional lender, a mortgage is defined as any conveyance of lien against a property that remains on the title until payment is made or specific stipulated terms are made. So, a contract for deed is considered a mortgage and must be notarized and filed with the local courthouse for it to be legally binding. If not formally filed, both parties could face legal repercussions. You can find a helpful contract for deed template below.
Contract For Deed Template
The Contract, made for this _________ day of ___________________, between
____________________, herein referred to as “the Seller”, and ____________________,
herein referred to as “the Buyer”, concerning the property at _____________________,
in _______________ county of _______________ state.
- The Buyer agrees to purchase the property for the price of $______________________
- The down payment price is $________________________________________________
- The terms of the sale are___________________________________________________
- The interest owed on the unpaid balance is an annual rate of _____________________
- Monthly payments will begin on ____________and continue until __________________
{insert any additional clauses or conditions necessary}
Buyer’s Signature: ________________________________________
Date of Signature: ________________________________________
Seller’s Signature: ________________________________________
Date of Signature: ________________________________________
Contract For Deed Bottom Line
Overall, a contract for deed is a great option for some buyers, but it certainly isn’t for everyone. It can be good for younger individuals trying to get on the property ladder, for example. This is because they may not have the savings and credit to qualify for a traditional mortgage but may well have the ability to do so when it comes time to make the balloon payment. If entering into a contract for deed, make sure you’re aware of all the legal implications and exactly what you’re getting into. Try to prepare yourself as well as you can to have to make the balloon payment by ensuring you keep your credit in good standing. If the disadvantages aren’t a real concern for you, a contract for deed is a great way to purchase a home.