For Home Buyers and Sellers: How a Contract for Deed Works

Image of a house door with keys in the lock. Captioned: How a Contract for Deed Works.

We’ve noticed, and maybe you have, too. Mortgage lenders have really been tightening their loan approval standards these days. Lenders are cautious because so many people are coping with layoffs, career changes, and volatile financial situations.

Some sellers are willing to help hopeful home buyers avoid the mortgage process, using the contract for deed. Often, these instruments are put to use when the seller has a family member or close friend who’d like to own, but has a non-traditional job or financial situation.

Also known as an installment sale agreement, a contract for deed is a home purchase — it’s just financed by the seller, not a financial institution. After the parties close on the agreement, the buyer lives in the house as the owner, and sends the seller monthly installments. The length of the loan and the installment amounts are negotiable. There might be no down payment, or a relatively modest one.

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The Quitclaim Deed’s Function in a Contract for Deed Sale

A contract for deed sale can present a convenient alternative to the traditional real estate conveyance. In this owner-financed deal, the buyer usually lives on the property upon the execution of the contract. While enjoying the property, the buyer pays for it in monthly installments, until the agreed-upon price has been paid in full.

Down the road, when full payment is complete, the purchaser formally acquires the title deed. This event occurs through a warranty deed, which guarantees that the seller is the sole party with any claim on the property to be conveyed – no exceptions, unless stated on the deed.

If things don’t go as planned, and the buyer defaults, recovery of the property can be a time-consuming process. Defaults happen, so a seller should consider having the buyer sign a quitclaim deed as part of the execution of the contract. A quitclaim is a non-warranty deed. It conveys property with no warranty for the title. Through this document, if it becomes needed, the buyer will relinquish any claim on the property. 

Here, we look at how the contract for deed sale works, and briefly examine the function of the quitclaim deed.

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What is a Contract for Deed?

If you’ve been turned down for a home loan from a traditional mortgage lender, don’t despair. You have options, and one of them may be a contract for deed. Also known as an installment agreement or land contract, a contract for deed involves seller financing for the property. If you see a home sale ad offering owner financing, it’s likely the seller has a contract for deed sale in mind. Another advantage – the buyer and the seller may structure the agreement in a mutually agreeable fashion.

How a Contract for Deed Works

A contract for deed is not one-size-fits-all. It is an agreement tailored to the individual needs of the buyer and seller, and offers great flexibility. The contract for deed terms, negotiated by both parties, includes the down payment, interest rates, amount of monthly house payments and how property taxes and insurance are paid.

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A Contract for Deed vs. Traditional Mortgage

Inability to get financing for a home does not always mean that someone does not have the financial means to pay for the home. This is also a way of extending credit to those who might not otherwise qualify for a loan. In fact, various housing advocacy organizations have used this as a way to help low-to-moderate income families achieve homeownership. In a contract for deed, there are no origination fees, application costs, or high closing costs. Rather than having third-party lenders financing the purchase of a home, the seller finances the purchase in a contract for deed.

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