Home sellers may offer alternative seller financing arrangements such as contracts for deed to make a house more attractive to a wide variety of buyers, or to sell a home that may be difficult to finance with a conventional mortgage. Sellers may also prefer alternative financing arrangements because they would like to structure the income from the sale over several years. Existing mortgages that the seller owes money on can complicate the contract for deed process.
A contract for deed is a method of property financing where the buyer and seller sign a contract that says after the buyer pays a certain amount of money in monthly payments, that the seller will sign the deed to the property over to him. These arrangements have risks for the buyer, because if the buyer fails to complete the agreement as it is written, the seller can often keep the money as rent and sell the home to someone else.
If a seller has an existing mortgage on his home, and he chooses to sell his home using a contract for deed, he will usually hire a third-party escrow account service to collect the payments from the buyer and send them directly in to the mortgage company. This type of escrow company protects the interests of both the buyer and the seller by making sure that the funds are distributed correctly.
'Due on Sale' Clause
Many mortgages have a "due on sale" clause. This means that the balance of the mortgage becomes due immediately, or is accelerated, if the house is sold before the mortgage is paid in full. In this case, it may be difficult to sell the home on a contract for deed. The only way to complete a sale may be for the buyer to execute a new mortgage loan to pay off the seller. Technicalities exist, however, because the seller still holds the title, and agrees to transfer it when the money is paid. Therefore, the house is not officially sold, and the contract for deed may continue.
If the home has a mortgage, the buyer and seller may prefer a rental agreement with an option to purchase the home. This agreement will run for a certain amount of time, and if the buyer completes the rental agreement, he can buy the home for an amount specified in the option agreement. If the buyer defaults on the rental, or decides to move out, most of these contracts are written to allow the seller to void the agreement and keep the money that the buyer paid as rent.