Lending: Buying a House "On Contract"
by: Iowa Legal Aid
Some people who buy a home borrow the money from a bank or other lender. The seller gets paid in full for the property, and the lender takes a security interest called a mortgage against the home. It can be hard to get a home loan from a bank, especially if a person has a low income. There may be no way to save enough for the down payment. For those who can manage to come up with a down payment, getting approved for a loan can be a big problem. A bank may not be willing to make home loans for inexpensive houses.
A lot of people who can't get a home loan from a bank buy a house on a contract. That involves the owner and the buyer entering into a legal agreement. Most buyers move into the home and pay the owner each month, with each payment counting towards the purchase price of the home. Buying a home on contract may be the only way for many Iowans to end up as homeowners. This article looks at a few aspects of buying a home on contract.
Selling a home on contract may just be a way to avoid the legal duties of being a landlord. By law, a landlord has to provide the essential services such as heat, electricity, hot water, etc. A landlord must also keep the home safe and habitable for the tenant. A contract seller does not have to do any of these things because they are not considered to be landlords. The buyer on contract should realize that he or she does not get protections the law grants to tenants, or have the same rights as persons who buy property through a lending institution. Here are some other important areas to consider:
The contract. It is important to understand the terms of any contract before you sign on the dotted line. This is especially true when it involves the biggest purchase most people make. The contract sets forth details like purchase price, interest rate, who will pay the taxes and how long the contract will last. Some home contracts include a "balloon" payment. This means that after the buyer has been making payments for a certain number of months or years, all the rest of the purchase price becomes due at once. This big payment is the "balloon." A five-year balloon is common, but it could be any period agreed upon by the buyer and seller. Buyers should beware of a contract with a balloon that they cannot handle.
Expected repair and upkeep. Although the contract buyer does not have legal title until the last payment is made, the buyer is the owner of the home. If the furnace goes out in the winter, or the roof leaks, the buyer must pay to have the problem fixed. If the buyer later breaks the contract by missing payments, he or she could end up paying for a new furnace or roof that will stay with the home. This makes it especially important to look for a home in fairly good shape that won't involve more repairs expenses than the buyer can handle.
What can happen in the event of missed payment(s). Many contract sales of homes have a "forfeiture clause." This means the seller does not have to go to court to foreclose the contract and get the home back if payments are missed. The seller just has to send the buyer a notice that there is a default. The notice gives the buyer 30 days to take care of the default by paying what was due to the seller. If the buyer does not take care of the default, the buyer loses the home and all of the payments to the seller. Then, the buyer must also leave the home or the seller may evict the buyer in as little as two weeks. This forfeiture process is a lot faster than the foreclosure process when a mortgage purchaser misses payments. If there is no forfeiture clause in the contract, the seller must foreclose just like when there is a mortgage.
Watch out for any liens on the property. When checking out a home to buy on contact, it is a very good idea to have a title opinion done. This will check for outstanding liens against the property. A "title opinion" is a document prepared by a person, usually a lawyer, who has checked the "abstract" (a legal record concerning the property) to see if any liens have been recorded against the property. The opinion also looks at other problems such as unpaid assessments for taxes. If a person gets sued and a judgment is entered against them, the judgment is a "lien" against any real estate they own or buy after the judgment is entered.
A home someone is buying on contract could have a lien against it. The lien should be paid before the property changes hands. If the lien is not paid, the person to whom the money is owed can force the sale of the home being bought on contract if the money is not paid on time.
Liens caused by the seller's actions usually won't attach to the buyer's home after the contract for the sale of the home is signed and the person has moved in. However, if the contract permits it, the seller could get a loan after the contract is signed which allows the seller to use the house in some way as security. This could cause problems for the buyers if the seller does not make payments on the loan. The creditor of the seller may try to force a sale of the home to pay a debt. The buyer may be able to work out a deal with the creditor, but maybe not. If you find yourself in this situation, contact an attorney.
You may be able to negotiate an agreement in the contract that stipulates you have a judgment for damages against the seller if he fails to keep the house free from liens during the term of the contract.
Buying a home on a contract can be a way for persons who are low-income or who have poor credit to become homeowners. However, there are certain risks to know about to avoid surprises after the contract is signed. You should always be sure the major parts of the house are in good repair and not likely to need to be fixed or replaced until after a time when you are sure you will be able to complete the contract. The purchase of a home is the biggest investment most of us ever make. You should not make this purchase without talking to a lawyer.
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