Buying a House "On Contract"
Authored By: Iowa Legal Aid
Buying a home usually requires borrowing money from a bank, which can be hard if a person has a low income. It might also be hard to save up enough money for a down payment. If someone cannot get a loan from a bank or afford a down payment, they might choose to buy a house on contract.
When you buy a house on contract, you make monthly payments, just like you would if you were renting a house or if you had a mortgage with a bank. Buying a house on contract is different from renting or buying, though.
When you rent a house, your landlord is responsible for providing heat, electricity, hot water, and so on. Your landlord also has to keep the house safe and habitable. A contract seller doesn’t have to do these things. It is important to be aware that these responsibilities are the contract buyer’s.
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, who will pay the taxes, and whether there’s a “balloon payment.” In some contracts, the buyer will make a regular monthly payment for a certain time, and then there will be a large payment due to pay off the rest of the debt. This large payment is the “balloon payment.” Often, balloon payments are very large and may be unaffordable.
A contract buyer is responsible for all repairs to the house. If the furnace breaks, that is an expensive repair. If the contract buyer later misses a payment and has to move out of the house, the repairs that have been made are for a home you do not own anymore. Make sure to look for a house in good condition from the start. Many contract sales of homes have a “forfeiture clause.” This means the contract seller doesn’t have to go to court to forfeit the contract if a payment is missed. The contract seller just has to give the buyer notice that there is a default. If the buyer doesn’t take care of the default within 30 days, the house and all of the payments may go back to the seller. The seller can then evict the buyer in as little as about two weeks. The seller still has to take the buyer to court by filing an eviction proceeding. If there is no “forfeiture clause” in the contract, the seller must foreclose just like when there is a mortgage.
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 or unexpected fees that a contract buyer may be asked to pay.
Buying a house on contract is one way for persons with low income or poor credit to become homeowners, but there are risks involved. Buying a home is a big decision, so make sure to be careful before signing a contract. You should also talk to a lawyer first.
Last reveiw 11/29/12