The apartment you’ve been renting for years seemed big enough until you added kids to the mix. Now you want a house.
The problem? You don’t have enough for a down payment. Or maybe daycare costs limit your monthly budget, or your credit history won’t qualify you for a mortgage.
Do you have to delay your dream?
Maybe not. For some young families, bypassing mortgages and entering a “Contract for Deed” with a seller lets them buy a house sooner.
What is a Contract for Deed?
In most home purchases, there are three parties: the seller, the buyer, and the lender. The lender provides the funds, the seller gets paid and hands over the deed, and the buyer makes payments (with interest) to the lender for the life of the loan.
In a contract for deed, there are only two parties: the seller also acts as the lender. The buyer can move in after making the down payment, and monthly payments (with interest) go to the seller.
The seller owns the property until the loan is paid off. Often, the loan term is shorter than a mortgage, with a balloon payment at the end and the expectation that the buyer will find other financing at that time.
Benefits of a Contract for Deed
Seller financing contracts can work well for young families because they are customized and can include almost any (legal) terms the parties agree upon, including additional large home improvement project(s). (Mortgages, by contrast, are often standardized and restricted.)
1. Less money down
Has your income gone into diapers and baby gear? If don’t have 20 percent saved, the seller may accept less—in exchange for a higher interest rate, monthly payment, or balloon payment at the end.
2. Lower monthly payments
You can negotiate a reduced payment with the seller, or an adjustable rate where you pay less at the beginning (e.g., while paying for daycare) and more at the end.
3. You don’t need perfect credit
If your credit score is too low for an institutional lender, an individual seller may still be willing to work with you.
As long as your seller is willing to negotiate, you can create a contract that suits your situation.
Downsides of a Contract for Deed
1. You could be evicted.
There are legal protections in place regarding mortgages, but with a contract for deed you could be kicked out for missing a single payment. Set up automatic payments and communicate with the seller if there’s a chance your check will be late.
2. It’s not yours yet.
You’re not building equity while you’re paying off the loan, so if you have to leave, you’re out of luck. Like rent-to-own, you need to pay the whole amount; then the property will be yours.
3. Fewer legit options
Sellers may be unfamiliar with this process or unwilling to take the risk. Scammers, on the other hand, have plenty of interest in working with you. Understand what’s at stake in any given scenario before you sign a contract.
If a standard mortgage won’t work for you, a contract for deed can get you the same result with more flexible terms. For a young family, it can be a path to earlier homeownership.