One of the hardest challenges today is buying or selling a home. Buyers with any sort of “ding” on their credit have trouble getting traditional financing. Conversely, sellers compete for buyers who can actually afford to pay their listed price because they did qualify for loans.
Enter the Contract for Deed. Under a Contract for Deed, a seller lends money to a buyer to purchase their home. This bypasses traditional financing, at least for a while. The parties first agree on a sale/purchase price. Then they hash out a down payment and a monthly payment for the Buyer, including an interest component. The Buyer covers the taxes and insurance on the property during this term, which stretches between two and five years. At the end, the Buyer makes a balloon payment which pays off the rest of the money owed to the Seller. Hopefully, when the balloon payment pops up, the Buyer has managed to improve his or her credit score to the point where they qualify for traditional financing. After the balloon payment, the Seller transfers the home title to that buyer and the transaction is complete.
During the monthly payment period, the Seller remains the titleholder to the home. However, if the Seller sells it to an outside party, that party would take ownership subject to the continuing terms of the Contract for Deed. If the Buyer misses payments, fails to pay the taxes and insurance, or cannot make the balloon payment, the Seller can cancel the Contract for Deed and evict the Buyer.
The Contract for Deed enables a Buyer to purchase a home even if they cannot get traditional financing. Contracts for Deed are also frequently used when buying and selling between family members. There are, however, pitfalls to the Contract for Deed which will be covered in parts 2-4 of this blog series.