Overview of Bad Credit Mortgage Contract for Deed
This is an unusual type of mortgage instrument, and
depending on your state, has a plethora of different
names including: Land Contract, Agreement for Deed,
Contract Sale and Real Estate Installment Agreement.
Though referred to by varying terms, its purpose is
the same to allow borrowers to bypass banks and mortgage
lenders and make payments directly to the seller.
The seller retains the title until the buyer has paid
off the entire amount. The seller must also continue
to pay any underlying mortgages that exist on the property,
presumably, from the proceeds of the monthly payments
being provided by the buyer. In a sense, the seller
is acting both as seller and as banker, since the seller
is actually self-financing the property. Since the seller
still holds legal title to the property, the contract
is 100 percent secured, and the seller can declare the
buyer to be in default for nonpayment, repossess the
property, and keep all the money that has been paid
A Contract for Deed is often entered into when a seller
has a property that may need substantial repair and
would not quality for a conforming bank loan, if the
house is in a blighted area, or if the buyer has poor
credit and would not qualify for a bank loan. The decision
to do business with the buyer does not have to pass
by any lending committee, and does not have to meet
any minimum standards.
The decision is solely up to the seller, and is sometimes
still done merely on a handshake and a promise. Although
the seller does not get all of the proceeds immediately,
the seller does have the advantage of retaining title
and calling all the shots, and often, selling a house
that would otherwise not be saleable.
The buyer gets the advantage of working directly with
the seller, who may be much more lenient than a bank
or mortgage lender. On the downside, the buyer must
trust the seller to pay off any underlying mortgage
notes, and have clear title at such time all payments
have been made.
The Contract for Deed may be an excellent way to buy
a home with poor credit, and an excellent way to establish
credit. Since the Contract for Deed is a negotiable
instrument, it can be bought and sold at any time by
the seller, who may choose to sell the contract at a
discount to a broker or investor. Often, it is used
as a way to get into a home and later finance it through
a conventional lender; for example, the Contract may
have a balloon payment two years out.
The advantage of the balloon payment arrangement is
that it gives the buyer an opportunity to accumulate
two years of timely payment history, and two years of
equity, and so when the balloon payment comes due, it
will be much easier to refinance the property through
a conventional lender, pay off the balloon, and have
established excellent credit in the process.