Buying a home is a big financial commitment. There is typically some sort of down payment, there may be closing costs associated with entering into a mortgage, and, of course, there are the monthly payments you have to make once you have signed the mortgage (see affordability guidelines for mortgages). If the homebuyer is not at the point where they think they can handle all of that, they may consider a contract for deed.
A contract for deed is a legal agreement where you make payments directly to someone selling a home for a given period of time before taking ownership of the property. It is not as common today but is still an option in some cases. The main advantage of this type of transaction involves avoiding the usual costs associated with obtaining financing from a bank or other lender, such as closing costs and fees.
However, it is easy for a contract for deed to go poorly and end up hurting the homebuyer financially. If you don’t handle things correctly, you could end up putting tens of thousands of dollars toward a home over several years and end up with nothing to show for it.
The most obvious danger of entering into a contract for deed is the risk of missed payments. Even one late payment can result in much higher penalties and fees, not to mention possible legal action from the seller (including kicking the homebuyer out of the home without recouping any money they have paid while living there). Additionally, balloon payments may be required after a certain amount of time has passed, which can also lead to financial hardship if not planned for.
If disputes arise between the buyer and seller of a contract for deed property, legal recourse is limited for the party living in the home. The purchaser has few options and may not be able to take full advantage of rights provided by law under a traditional mortgage.
Lastly, when entering into a contract for deed, homebuyers must beware of any items not explicitly included in the transfer of the home. For instance, personal items, appliances, and other fixtures may not have been expressly written into the agreement, and the seller may not leave them in the home upon the final transfer of the title. It is important to identify these items and make sure they are also transferred with ownership of the property.
In conclusion, contracts for deed certainly have their advantages but must be approached with caution. Make sure to understand the risks and limitations that come along with this type of transaction before entering into one.
When you’re trying to buy your first home, it can be tempting to save some money and opt for a contract for deed. Before you do, it is best to speak with experts in the real estate industry so you fully understand what you are taking on.
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Twin Cities Habitat for Humanity : 12:00 PM on June 14, 2023
Editor's note: The following information was updated in 2023 to include additional homebuyer resources.
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