Contract for Deed 

The process of buying or selling a home can be overwhelming. It’s time-consuming, complex, and above all, expensive. For some would-be buyers, purchasing a home may be out of the question, especially if they don’t have access to traditional financing methods. Luckily, there’s an alternative for these buyers that cuts homebuying costs and moves a sale along quickly: a contract for deed.  

This creative financing option can be beneficial both to buyers and sellers, but it’s important to know the contract for deed meaning and the required steps of a contract for deed before you commit to signing one. In this article, we’ll walk through what contracts for deed are and how they work. If a contract for deed is right for you, you can download a free copy above. 

What is a Contract for Deed?  

So, what is a contract for deed? Also known as a land contract, a contract for deed is an independent financing agreement that facilitates the transfer of land where the seller retains legal title until the buyer completes a series of payments. 

By eliminating the need for a mortgage through a financial institution, payments from a buyer go directly to the seller for an agreed-upon time before the buyer is able to take ownership of the home. During the payment process, the seller reserves the right to the title to the home, then once the payments for the full purchase price are complete, the title is transferred to the buyer. During the intermediary period, the buyer is usually also responsible for paying for property taxes, repairs, insurance, and other expenses incurred as part of their monthly payments. 

Because a contract for deed allows financing without the use of a lender or mortgage, you’ll save money on closing costs and be able to record the deal much faster than a traditional home purchase. However, it also offers fewer protections for buyers and sellers if the deal goes awry or if the buyer stops paying their monthly amount. A lawyer can explain the aspects of a contract for deed for your specific situation. 

When is a Contract for Deed Used?  

This kind of financing is most commonly used when a buyer is unable to access traditional financing solutions. Usually, this means that their credit is too low to obtain a loan from a bank. By using a contract for deed, they’re able to finance a home purchase without the need for a lender at all, and they’re offered flexibility in the terms of the specifics of the contract, such as interest rates, down payment amount, and monthly payment amounts. 

Contracts for deed are also commonly used between friends and family who trust that their loved one will pay consistently throughout the duration of the contract. 

Who is Involved in a Contract for Deed?  

A contract for deed includes a buyer and seller who will agree on and sign for specific contract terms. The buyer will agree to pay installments to cover the cost of the home, while the seller agrees to hold the title until the payments are complete. These roles should be explicitly and clearly listed in the contract to avoid ambiguity or confusion. Additionally, a notary must act as a witness for the contract to certify it before any payments begin. 

What is Included in a Contract for Deed? 

There are many components of a contract for deed that must be agreed on by both parties before the document is signed. The first is the simplest: the purchase price. If you’re in the process of signing for the sale of a home, a purchase price has probably already been set. You’ll also need a set down payment amount to be paid upfront for the home before any other payments are decided. 

Other aspects of a home purchase that would traditionally be handled by a lender now fall to both the buyer and seller to decide together, such as an interest rate, payment schedule, and total payment amount required for the seller to transfer the title for the property to the buyer. 

Generally, a contract for deed is simply an agreement that a seller will hold the title for a home while a buyer pays them directly through monthly installments. The buyer will pay a specific amount for a specific number of months at a specific interest rate until their credit allows them to qualify for a loan or until the house is paid in full. 

Keep in mind that a land contract offers less protection to sellers in the case that a buyer defaults on their payments — they could easily lose their previous payments and possession of the home if personal circumstances require them to stop paying on the property. You should always consult a lawyer about the terms of a contract for deed if you have questions or concerns. 

Contract for Deed FAQs  

How long is a contract for deed good for?

A contract for deed is different from a mortgage in many ways, but one specific way is through the length of the payment term. Typically, buyers are locked into 30-year mortgages; in contrast, a land contract can be as long as the buyer and seller want. A typical contract for deed is about five years long with a balloon final payment at the end. 

What happens after I complete a contract for deed?

After a contract for deed agreement is signed and a notary certifies it, the buyer is free to move into the home and begin their payments as directed by the contract. Because this contract eliminates the need for a lender or mortgage, the closing process is much faster, and the buyer can move in much more quickly than they would be able to for a traditional home purchase. 

What if the buyer breaches the contract for deed agreement?

If a buyer breaks the contract by defaulting on payments, they risk losing access to the property as well as all their previous payments on the home. Because the seller still holds the title to the property, it’s much easier and faster for a contract for deed agreement to be canceled and for the buyer to be evicted from the home if they breach their contract. 

The buyer may alternatively be given a short amount of time to fix the issue (usually 30-60 days) before an eviction follows. 

Why are contracts for deed used?

The choice to use a contract for deed over a traditional mortgage may be made for several reasons. As mentioned above, contracts for deed involve an easier qualification process and more flexibility in the loan terms. The entire agreement and home buying process may take less time as a result. Additionally, the buyer may have lower mortgage payments in this type of real estate transaction as well as fewer upfront costs like closing costs (e.g., origination fees, underwriting fees, attorney fees, etc.). The deed contract and its remaining provisions can be more flexible and suited to the buyer and seller’s individual circumstances. 

Conclusion  

With this new knowledge, you’ll be able to answer the question, “What is contract for deed?” and make an informed decision about entering into a contract of this kind. There are many reasons to use a land contract or contract for deed. You can download a free Contract for Deed template through Innago above to take the first step in buying or selling a property without a third party. 

Disclaimer: Innago does not provide legal advice. This article is for educational purposes only and may not include the most up-to-date information. We recommend you consult with professional counsel if you have legal questions regarding your compliance with relevant laws.