Buying a Home on Contract
Authored By: Iowa Legal Aid
Buying a House On Contract
What is buying a house on contract?
Buying a house on contract simply means agreeing to buy a house and entering into a contract with the seller. The buyer and seller will agree to a purchase price as well as other terms. The buyer usually agrees to make an initial down payment and then a number of regular payments. After the buyer makes all payments and completes other important obligations the seller then transfers title of the home to the buyer.
Why do people buy a house on contract?
Most people borrow money from a bank to buy a home and this is called a mortgage loan. But many people do not qualify for a loan for reasons such as a negative credit history or low income. For those who cannot get a loan from a bank they might choose to buy a house on contract instead.
How is buying a house on contract different from buying a house with a mortgage or renting?
When you buy a house on contract you make regular payments just like you would if you were renting or had a mortgage with a bank. But there are a few important differences.
When you rent a house your landlord is usually responsible for maintaining the property. When you buy a house on contract these responsibilities are yours alone.
Most contract sales of homes also have a forfeiture clause. This means you lose your right to the home if you do not make the required payments or don’t follow other important terms in the contract. If you forfeit the contract the seller usually gets to keep all payments and improvements you made while the house was under contract. This is different from a mortgage loan. With a mortgage loan you get to keep any equity in your house after forfeiture.
Another common term in contract sales of homes is a “balloon payment.” A balloon payment is when a buyer makes regular monthly payments for a certain time and then the rest of the debt becomes due all at once. This large payment is the balloon payment. Most mortgages do not have a balloon payment but instead allow you to make regular payments until the balance is paid off. Many people try to obtain a mortgage loan from a bank to pay off the balloon payment on their real estate contract. Often, balloon payments are very large and many people cannot afford the payment and cannot get a mortgage loan so they lose the house when they can’t make the payment.
What should I look out for when buying a house on contract?
Make sure to look for a house in good condition from the start. It’s a good idea to have the house inspected before you agree to the contract so that you are aware of any maintenance or code issues. Some municipalities require an inspection of the home before it can be sold.
Another thing to look out for is a lien on the property. 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.
Always make sure to read any contract before you sign it. When buying a house on contract this is even more important because of the cost involved. You will want to know the total cost of the house, the interest rate, which party will pay the taxes, and whether there’s a balloon payment. Carefully analyze the terms of the contract to make sure it is a smart financial decision. It is best to retain a lawyer.
What rights do I have if I buy a house on contract?
After buying a home on contract you should make sure the seller records the contract with the county recorder’s office within 90 days after signing the document, as required by law (or 30 days in cases where the seller has sold at least 4 residential real estate contracts within the last year). If your contract is recorded you can be notified of any bankruptcy proceeding filed by the seller as well as other actions that could affect your interest in the home.
If you have missed payments or haven’t complied with a term of the contract the seller must take certain steps before you lose your rights under the contract. The seller must serve you notice of the default and give you 30 days to take care of the default. If you don’t take care of the default within 30 days the contract is forfeited and the seller is entitled to take the house back and keep all payments and improvements. The seller then usually has 30 days after forfeiture to evict you as a “holdover tenant” by filing a summary eviction proceeding in court as long as the contract includes a holdover tenant clause allowing for summary eviction. If the seller doesn’t start summary eviction proceedings within 30 days after forfeiture, or if your contract doesn’t have a holdover tenant clause, the seller will probably have to use a lengthier court proceeding to evict you.
If the seller sells multiple properties in a year, or even if he or she sells just one house on contract with the help of a broker, the seller has to follow stricter rules. These stricter rules require sellers to make sure you are able to repay the loan, to give you certain notices, and regulate what terms are allowed in the contract, among other things. These requirements come from laws like the Truth in Lending Act (TILA), the Home Ownership and Equity Protection Act (HOEPA), as well as other state and federal regulations. Make sure to keep all notices and documents the seller gives you when you purchase a home on contract. You may consult a lawyer to determine whether a seller is covered by any of these regulations and to determine your rights. If a seller violates these regulations you have remedies for damages, attorney fees, and the right to cancel the contract.
Should I buy a house on contract?
Buying a house on contract is one way for persons with low income or poor credit to become homeowners, but there are substantial risks involved. Buying a home is a big decision, so make sure to be careful before signing a contract. It’s always best to talk to a lawyer before purchasing a home on contract.
Where can I get help if I purchased my home on contract and now have problems related to the contract?
Iowa Legal Aid provides help to low-income Iowans.
- To apply for help from Iowa Legal Aid:
- call 800-532-1275
- Iowans age 60 and over, call 800-992-8161
- apply online at iowalegalaid.org
If Iowa Legal Aid cannot help, you can look for an attorney on “Find A Lawyer” on the Iowa State Bar Association website – iowabar.org. A private attorney there can talk with you for a fee of $25 for 30 minutes of legal advice.