If you have ever thought about selling your house via an owner financing arrangement, you may have thought about doing a contract for deed. But just how does a contract for deed work? It may be easy for a realtor to advise you to use a contract for deed when you are making inquiries, but telling you how exactly to do one is another story. Luckily, I have done this type of contract before, so I can give you the details.
The Basics of a Contract for Deed
A contract for deed, in a nutshell, is a cross between a true mortgage, and a rental agreement. In this scenario, the buyer agrees to make a certain number of payments at an agreed priced, while the seller agrees to sign over the deed to the property at the end of all payments. In essence, the seller is giving the buyer a mortgage on the property, but not delivering the title to the property until the mortgage is completely paid off. It is highly recommended to get a contract like this notarized, because the seller is not going to be filing the agreement for public record. The agreement is strictly between the buyer and seller, and to all other parties attached to the property (e.g. the county clerk’s office, any lien holders, etc.) it is still fully owned by the seller. In most cases, the seller is using the contract for deed as a “wrap-around” for their existing financing.
Contract for Deed Problems and Cautions
If you are the seller, be careful using this method of owner financing. If your existing mortgage has an alienation (or due on sale) clause, then your mortgage company has the right to call the note in full upon the discovery of a new owner. These days, most conventional mortgages contain a clause like this, however FHA financing does not contain this clause, and you can do a contract for deed.
If you are the buyer, request a copy of all current and future mortgage statements from the seller. You want to make sure that the seller isn’t taking your money, and not paying the mortgage. You could, and others have ended up losing their home this way, as the mortgage company forecloses on the property.