The current housing market still strongly favors sellers. Here’s what to consider if you’re weighing a sale.
What is a contract for deed?
A contract for deed is a legal agreement for the sale of property in which a buyer takes possession and makes payments directly to the seller, but the seller holds the title until the full payment is made.
Normally, when a buyer wants to purchase a home, he or she goes through a traditional mortgage lender, like a bank or credit union. However, there are a number of good reasons for a buyer and seller to enter into a contract for deed:
- The buyer may not have a sufficient credit history or high enough credit score to qualify for a traditional mortgage. It’s also possible that the buyer’s credit score and income are adequate, but he doesn’t have the necessary down payment. In a situation like this, the seller may require the buyer to pay a higher interest rate than he would pay to a traditional lender.
He also may finance the deal for a set number of years and write a balloon payment into the mortgage. For example, the seller may agree to carry the note for seven years, making it necessary for the buyer to either refinance the home or sell it at the end of that term.
- A seller may want to enter into a contract for deed during a period of high interest rates, as offering a discount on traditional rates will draw potential buyers.
- Closing can take place earlier because there is no lender involved, and closing costs may be less for the same reason, particularly if no Realtor was used in the transaction.
This mortgage calculator can help you prepare for a home purchase.
Contract for deed example
Sellers may work through a real estate agent or attorney, or advertise on their own to find a buyer interested in a contract for deed. The transaction would involve the buyer making payments to the seller, who holds the title to the land or house until full payment has been made. This also may be referred to as a “land contract,” “bond for deed” or “installment land contract.”