YOU ASK:

What is a contract for deed?

WE ANSWER:

Also known as a land contract or installment land contract, the contract for deed is used during the sale of a property. In contrast to a mortgage that is used by a bank or a lending institution, this contract is between private parties.

Here, the one financing the purchase is the seller (rather than a bank). The buyer signs the contract with the conditions as to the purchase price of the property, as well as the monthly installments. The seller continues to hold the title. When the buyer fully pays the loan, the title is then transferred to the buyer.

A contract for deed comes very useful to prospective buyers who may not qualify for a loan with the bank, such as those with bad credit ratings. A purchase using a contract for deed may also require a low down payment. Another advantage is that when the buyer misses some payments, what he needs to do to keep the house, is to bring the payments current. This should be done within a time limit. The contract does not have acceleration clauses, where the buyer is made responsible for the rest of the loan balance upon his default of the loan.

A contract for deed makes it easier for a buyer to own a house. Aside from the low down payment requirement, there are also very low closing costs, as well as application fees and origination fees.

However, there is also a risk to the buyer because of the fact that the seller holds the title. If there is a default on the contract, the buyer risks everything, including all that he has previously paid. The seller can regain possession of the property (including all improvements to it), and still get the payments already made. The seller also does not need to go through a judicial action or a foreclosure sale.

As with other deeds, the contract for deed should also be recorded in the county property office. This should be done within four months after the signing of the contract, or else a penalty will be imposed on the principal amount.

Was this question and its answer useful?
Not a bit
  • Currently 3.3/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Very useful
Have a question about insurance? Ask the experts
Share: