By definition, a contract for deed is an agreement for purchasing property without having to go to a mortgage lender, where the buyer agrees to directly make monthly payments to the seller who will then turn over the deed when the former has paid off the entire loan. It is often a cheaper and simpler alternative to purchasing with a mortgage, but it does not come without risks. Here are the pros and cons of contract for deed:
List of Pros of Contract for Deed
1. It is a great alternative for those who do not qualify for a mortgage.
If you cannot qualify for a mortgage due to some issues, such as unemployment and past bankruptcy, this agreement serves as a great alternative, where all you need to proceed is knowing that the seller is willing to do business with you. With such, you will have more freedom to negotiate a down payment and will not have to pay the origination fees, closing costs and other expenses involved in getting a mortgage. However, remember that, if you default on your mortgage, your lender could demand you to pay off the entire loan even if you have complied with the payments, but a seller using a contract of deed is given such right, so consider this aspect in your contract.
2. It allows sellers to do business with buyers who are not qualified for a mortgage.
As for the seller, this type of contract offers him a way to do business with a buyer who is not able to qualify for a mortgage. Usually, the process involved is quicker than a mortgage sale. If the buyer defaults, the seller can then terminate the contract promptly without all the legal procedures that are required when a mortgage holder forecloses on a home.
3. It is flexible.
The exact terms of this type of contract are flexible, depending on what works for the parties involved. Basically, the amount of payments and time are up to the seller and buyer.
List of Cons of Contract for Deed
1. It comes with significant risks for buyers.
As a buyer, you will have no claim to the property until you have paid off the entire purchase price, which means that, if you default and are not able to make the payments, you lose all the money you have put into and the property.
2. It does not suit all investment strategies.
One big disadvantage of a contract for deed is that the property will not be off your hands for many years, which might not be good for your investment strategy. Aside from this, you will have to wait until the contract is finished to receive all of your money, rather than the immediate payment you would get from a mortgage sale.
3. It brings about risks for contract purchasers.
As a buyer, bypassing a title search could create serious consequences, so you should not blindly sign such a contract without verification. Also, an aggressive creditor might obtain a judgment against you if you subsequently abandon the property.
Generally, buying a home on a contract for deed has its pros, especially if you have some serious hits on your credit or require a substantial investment for a down payment. However, it also comes with cons, so it will just boil down to how comfortable you are with this type of agreement.
Crystal Lombardo is a contributing editor for Vision Launch. Crystal is a seasoned writer and researcher with over 10 years of experience. She has been an editor of three popular blogs that each have had over 500,000 monthly readers.