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Education for Justice FACT SHEET H-20 Fall 2009 |
“RENTING TO OWN” A
HOME
OR BUYING ON A
CONTRACT FOR DEED
BE CAREFUL! Buying a house is complicated. Many people get into trouble when they rent a house with an option to buy it, or when they buy it under a contract for deed.
THE DIFFERENCE BETWEEN “RENTING TO OWN” AND A
CONTRACT FOR DEED
“Renting to own” usually means renting with an option to buy. Under this kind of agreement, you are still a tenant, and the seller is still a landlord, until the final purchase. A contract for deed is very different. As soon as you sign the contract, you are responsible for repair and maintenance, and usually for the taxes and insurance.
TIPS ON RENTING TO OWN
· Get the agreement in writing! Don’t agree to anything that is not written down. The law will not enforce agreements to buy a house unless they are in writing!
· Make sure the agreement says what part of your payments are rent and what part go toward the purchase.
· Make sure the agreement says when the actual sale will be, and what the terms will be. It should say if the sale will be by a contract for deed, or if you need to get a mortgage. If you need a mortgage, talk to a bank to see if you qualify for one before you sign the agreement.
· Make sure the seller really owns the home. Check the title at the county recorder’s office.
· Watch out for scams. Some landlords do not really want to sell the home. They use rent to own agreements to get down payments and more money from tenants or to get tenants to do work on the home.
WHAT IS A CONTRACT FOR DEED?
· A contract for deed means that instead of paying the seller all at once, you buy the house over a period of time, like 5 years. Usually, you make monthly payments for a few years, and then you have to make a big “balloon payment” to finish buying the house. To make a balloon payment, you usually need to get a mortgage from a bank. If your contract for deed has a balloon payment, make sure you will be able to get a mortgage. Otherwise, you will lose the house and all the money you have paid into it!
· If you don’t make all of your payments, you will lose the house. The money you have put into it will be wasted. If you do not make your payments, a contract for deed can be canceled in 60 days, much faster than a mortgage. Once the contract is cancelled, you can be evicted. You won’t have much time to make up for missed payments.
GET A “TRUTH IN
Before signing any agreement to buy, ask the seller for a
“Truth in Sale of Housing Report.” This
report is from an independent inspector about the condition of the house. It is required in
MAKE SURE THE SELLER IS ACTING LEGALLY WHILE YOU PAY
· Make sure the person you are buying from owns the home. Check in the county recorder’s office to see who the registered owner is. After you and the seller have signed the contract for deed, the seller must give you a copy of it with original signatures. IT IS VERY IMPORTANT that you record the contract for deed at the county recorder’s office so others will know you have an interest in the property. Unless the contract for deed states otherwise, the seller must pay any delinquent taxes that are required to be paid prior to recording.
· If the seller has to pay a mortgage on the property, or taxes, or insurance, you should check on it now and then to make sure they are paying. Some “scam” sellers will keep a buyer’s payments and not pay the mortgage. If the seller does not pay the mortgage and the home is foreclosed, you will lose the house and all the money you paid. Contact the seller’s mortgage company to find out if they are paying it. Check the county recorder’s office for information on the mortgage company or companies.
PLAN ON THE ADDED COST OF OWNING
· If you sign a contract for deed, you have to repair and maintain the home. To protect yourself, know the condition of the home you buy. Otherwise it may cost you a lot of money to keep it up. For example, you can be tagged by the housing inspector if your house needs to be painted or other repairs are needed. If the furnace breaks, you have to fix it. If you don’t make the repairs, the house could be condemned and you would have to move out.
· Find out the property taxes. If the property was not homesteaded and you move in after June 1, you’ll pay taxes at the higher, non-homestead rate for the rest of that year. Make sure the contract for deed states whether property taxes and hazard insurance are included in your monthly payments or whether you need to pay them in addition to your monthly payments.
UNDERSTAND THE INTEREST COSTS
Your payments on the contract for deed will also include interest. For example, if you buy a $100,000 home with no down payment and a 10% interest rate on the contract for deed, you will pay about $10,000 in interest during the first year. So if you pay $1,000 a month, at the end of the first year you will have paid only $2,000 of the house price and $10,000 in interest. You will still owe about $98,200 on the house after paying $12,000. Some contracts for deed have interest-only payments. This means that none of your payment goes toward the house price. When your balloon payment is due, you will still owe the whole cost of the home. Before you sign a contract for deed, call up some banks to compare the interest rate the seller offers you with the interest rate on a mortgage. If you can get a mortgage loan, it is usually better to buy your house with a mortgage than on a contract for deed.
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