If you were buying a home in a “traditional” sense, you would acquire a mortgage loan from a Lender. the seller of the home would receive cash at closing and he would be removed from the transaction. You would then make payments to your Lender until your mortgage was paid in full. If you were unable to make the required payments, you would lose your home, and the Lender would now take back the property that was collateral for the monies they advanced you.
A Contract for Deed is a little different. Typically, this transaction happens because you as the buyer cannot qualify for a mortgage loan, or, the property does not meet the standards set by the Lender. So, you will not be offered a loan. Now, your seller will step in and negotiate terms directly with you – sales price, down payment, interest rate, etc. He may be willing to accept a smaller down payment or a poorer credit history. As a result, you can purchase the property. But, the seller will retain Title. You will occupy the property and make installment payments over the life of the term agreed to. When all those payments have been made, only then will Title to the property revert to you. Essentially, the seller has all the responsibilities of ownership – you have none – during the term of the contract. If you cease making payments, the seller has the right to terminate the contract and you could potentially lose any or all monies you have paid.
About 1/2 of the states are Contract for Deed states, and some of these states will also allow Deed of Trust transactions. Some Title companies in some states will not provide Title Insurance for Contract for Deed. Where possible, some Note Buyers will want to convert a Contract for Deed to a Note and Deed of Trust.
Bottom line, it may be best to consult with a real estate attorney in your state before agreeing to be either a buyer or seller in a Contract for Deed. Once you understand the advantages and disadvantages, you can decide what is best for you.
