If you’ve been turned down for a loan from a traditional mortgage company and been told by your bank that you don’t qualify, and don’t want to waste the time trying to obtain alternative funding and going through another loan process, a contract for deed might help you get the property you’ve been dreaming of owning.
A contract for deed, also known as a land contract or instalment agreement, is a legally enforceable agreement when you want to buy property but experience the following scenarios:
- Don’t qualify for a traditional mortgage
- No lender wants to finance the property due to a poor location or condition
- Both parties want to eliminate closing and attorney fees, surveying, and title search fees that are required for traditional mortgages
Under this type of agreement, you acquire equitable title to the property, which lets you receive legal title once the deed is transferred. Under an equitable title, you cannot sell the property, but you have a right to benefit from any appreciation in its value and to enjoy other rights of ownership. You take possession of the property and agree to make monthly payments to the seller until you pay the seller in full. The seller retains legal title to the property and relinquishes it to you once you pay off the debt. If you default on making payments, the seller can repossess the property, and you may not have protection under foreclosure statutes. Once you’ve broken the contract, the seller may keep the instalment payments made up to that point.
In a contract for deed, the seller is also financing the purchase of the property. Benefits of seller financing include:
- More flexibility in due dates, monthly payment amount, loan term, and interest rates than with traditional lenders
- Seller can defer capital gains by waiting until the buyer pays off the debt, which may be many years in the future when the seller is in a lower tax bracket.
You and the seller may structure the sale any way you prefer, as long as there is a meeting of the minds, which means both of you are in mutual agreement and put the contract in writing for it to be enforceable.