If you wish to sell your home using a contract for deed, you first must recognize the risks that come with it for both you and the buyer. Before selling via contract for deed, weigh the pros and cons carefully to decide if it is the best move for you and your buyer.
What is a Contract for Deed?
In a contract for deed, the purchase of a property is financed by the seller instead of a third party such as a mortgage banker. Contract for deed is usually used to sell homes to buyers who are unable to get traditional financing.
The buyer agrees to pay monthly payments directly to the seller, who will turn over the deed to the property when the entire loan is paid off.
Contract for Deed Carries Risks for Buyers
A contract for deed provides the buyer with less protection than if they obtained a traditional Kansas City mortgage to purchase the property. The buyer makes monthly payments to the seller over a short period such as 5 years. The buyer will then be required to pay a balloon payment, an oversized payment due at the end of the mortgage.
If the buyer is unable to obtain financing during this time from a mortgage company or cannot pay the seller in full, the seller can choose to revoke the sale. All payments the buyer has previously made cannot be recovered.
The seller can also terminate the contract immediately without taking the time for the legal procedures required for a mortgage holder to foreclose on a home if the buyer goes into default. Buyers are also typically responsible for repair or maintenance costs along with tax and insurance fees.
There are Obstacles for Sellers as Well
Two of the biggest obstacles sellers will face when trying to sell their home via contract for deed are due-on-sale clauses and lender permissions. Transferring ownership interest on a home will normally trigger a preexisting mortgage’s due-on-sale clause.
This clause exists to safeguard mortgage companies from having a mortgage transferred without permission. It allows the lender to demand the repayment of their loan in full. You must contact your mortgage lender before attempting to sell your home via contract for deed. This is where lender permissions come into play.
Your lender will let you know if you can sell your home via contact for deed or if it violates your contract with them. As a seller, you can try to negotiate permission with your lender to sell your home via contract for deed.