Explanation of Contract for Deed
What is Contract for Deed
Contract for deed is a special agreement wherein a seller and buyer come together in a financial understanding that the buyer would purchase a property from the seller against a loan that has been granted to by the seller.
In simpler words, if a seller owns a property and intends to sell it and there is a buyer who wishes to buy it, the buyer may not make the entire payment or get a mortgage to buy the property. Instead, the seller may ask for a substantial payment upfront and then split the remaining amount into several installments that the buyer would then pay periodically. The installments can be equated or there can be smaller installments over a period of time followed by a large payment to end the financial transaction.
Limitations with Contract for Deed
There is no limitation as to the term of the financial arrangement in a contract for deed but the terms are usually much shorter than a normal mortgage. Also, in a contract for deed, a buyer doesn’t have to provide any credit history records or similar documents.
A contract for deed allows a buyer to take possession of the property immediately after executing the agreement and making the initial payment. The buyer can stay in the property, keep it as it is or rent it out. However, the legal ownership of the property would still be with the seller, until such time the total amount of money agreed upon initially is paid by the buyer. In other words, the property is purchased but in a way hypothecated to the seller. The seller is legally bound to transfer the ownership or title deed of the property to the buyer once the final payment is made, without which the seller can retain the ownership or even sell the property later on with consent from the buyer and compensate the buyer accordingly on the basis of the payments made.
A buyer can take a mortgage to pay the eventual installment which is often a huge chunk of money. The primary reason why people get into contract for deed is because a buyer can own a property without making a huge down payment and without a mortgage if one is not available. Contract for deed can be regarded as a distant but similar version of rent to purchase agreement.
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