Many Americans choose to purchase their homes on contract. This sort of deal can be a good idea for those who want to be homeowners but lack the funds for a sizeable down payment or cannot qualify for financing through a bank or mortgage company. When you purchase a house on contract, the homeowner retains the title to property while you continue to make agreed-upon monthly payments. The title will not be transferred to your name until you have paid it off in full.
While these deals can provide you with a great way to purchase an affordable property, there are a number of things that can go wrong. By using the following ten tips, you can avoid a lot of potential problems. But first, make sure you're covered with an affordable home insurance policy.
Tip #1: Know that Purchasing a House on Contract is Very Different from Renting
When you purchase a house this way, you are, in a sense, a renter until the property is paid off. However, you will not have any of the benefits associated with renting. If an appliance breaks down or if the roof needs to be repaired, you will be responsible for assuming all costs. The property owner has no obligation to provide you with a safe or livable home and you have no recourse for any problems you may find on the property after you sign the purchase contract.
Tip #2: Be Certain that the Property is One that You Want
When you purchase a house on contract, there are rarely provisions written into the contract to provide you with any type of refund if you change your mind about the property. If you wish to live elsewhere, you will simply need to walk away from the home and the seller will get to keep any payments you have made as well as the property.
This means that if you need to move because of a job or if you simply do not like the property after a couple of years, you will lose everything you put into it, including home repairs, unless you first pay if off in full.
Tip #3: Consider the Costs Involved in Updating the Property
In nearly every case of a house sold on contract, the property is sold as-is, and buyers frequently do not bother with paying for a home inspection. You are likely to be walking into a real fixer-upper. If you are personally familiar with the work involved in updating a house, you may have a fairly good idea of what your costs will be; but if you are novice, you may be unpleasantly surprised.
There may also be hidden problems about which you are unaware, such as the presence of black mold, termites or wood rot. If you are forced to spend a lot of money making home repairs, you may end up defaulting on your house payments to the seller, in which case you will lose not only the property, but all the money you have sunk into repairs.
Tip #4: Make Sure that the Seller Owns the Property Outright
Frequently, houses sold on contract are sold by investors who have purchased the property outright at auction. However, if the seller you are contracting with owes money on a mortgage for the property, you are putting yourself at risk. If the seller defaults on payments, the property can be foreclosed on.
Even if you have been faithfully making your monthly payments to the seller, your contract can be rendered invalid and you will lose everything you have paid toward the property. You are best off dealing only with sellers who own the property outright.
Tip #5: Remember, until Paid Off, You Are Not Considered the Homeowner
Until the property is fully paid off, the deed will not be transferred to your name and you will not be considered the homeowner. This can have implications if you wish to take out a home equity loan or qualify for reduced rates on some insurance products. Also, it makes things a bit more complicated for your beneficiaries if you pass away before the property is paid off in full, since it will technically not be yours, despite how much money you may have paid on it.
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Tip #6: Make Sure that Your Contract Does Not Have Penalties for Early Payoffs
In cases of for-contract house sales, it is to your advantage to pay the house off in full as soon as possible so that the deed can be in your name. So long as you have a contract that does not penalize you for early payoffs, you can make additional payments each month in order to shorten the time it takes to be the official owner of the property.
Tip #7: Beware of Balloon Payments
In many cases, the seller will require a large balloon payment after five or ten years. Be sure you are aware of how much this payment will be. In many cases, the payment amount may be large enough to require you to take out a loan. If your credit is not very good, you will need to work hard to improve it before the balloon payment is due.
If you cannot make the balloon payment, you will lose the house and everything you have invested in it to date. Robin Laurain of the Yahoo Contributor Network writes, “It would be safer to rent to own a home or buy a home on a land contract that does not have a balloon payment.”
Tip #8: Check for Liens on the Property
According to Iowa Legal Aid, “Before buying a property, it is a good idea to have a title opinion done. A title opinion looks for problems that might affect ownership of the property or unexpected fees that a contract buyer may be asked to pay.” Liens that might be attached to a for-contract home include past-due taxes, unpaid construction fees, and debts owed to a homeowners association.
Additionally, it is possible that other parties may have a controlling interest in the property and could potentially claim it as their own. It is in your best interest to ensure that the seller has a free-and-clear title to the home before you agree to sign any contracts.
Tip #9: Read the Contract Carefully
Make sure you know everything that is included in the contract before you sign it. There is nothing wrong with asking for a couple of days to review the terms of the contract before you close the deal.
There are a number of things that should be addressed in the contract, including answers to such questions as: What is the agreed-upon interest rate? Who is responsible for paying the property taxes? Who is responsible for insuring the property? What are the implications of a late payment? How long after a missed payment can the seller evict you from the property?
#10: If Possible, Consult a Real Estate Attorney
If you can afford to do so, it is a good idea to retain the services of a real estate lawyer to review your contract before you sign it. Dana Sparks at SFGate writes, “Perhaps even more complex than a standard home purchase, a land contract has special challenges, and careful consideration must go into creating the binding contract.”
An experienced real estate attorney will be able to spot potential problems in the contract and can negotiate with the seller to resolve these issues in a way that is agreeable to both parties.
Enjoy Your New Home
A for-contract home sale that is executed without mishap can be a win/win situation for both buyer and seller. We wish you the best of luck with your home purchase. If you do buy your house on contract, remember that although the seller may insure the property while it is still in their name, you need to insure your own personal property. Speak to one of our agents to learn more about purchasing coverage for your home and for help finding a policy at a great rate.