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. The following information 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:
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 repair 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 buyer misses payments. If there is no forfeiture clause in the contract, the seller must foreclose just like when there is a mortgage.
Contracts for the sale of land are supposed to be recorded at the recorder's office. This is so anyone who wants to know who owns the property can find out. But sometimes, the seller does not record the contract. Then, someone else can buy the property. As a result, there may be problems regarding who owns the property.
If it appears that buying a home on a contract can be risky, it is also true the contract buyer does have some protections under the law. All real estate contracts made after July 1, 1998, must be recorded at the county recorder's office within 180 days after they are signed. If the contract is not recorded within that 180 days, the contract seller cannot forfeit the contract, but must file a foreclosure action just as if the home had a mortgage. And, the contract seller is subject to a fine of $100 for every day over the 180 requirement. The county attorney is supposed to prosecute the case and any money received is to go into the county's general fund. Also, if the contract seller is a person who has sold 4 or more properties on contract within the previous 365 days, the contract must be recorded within 45 days.
Watch out for any liens on the property
When checking out a home to buy on contract, 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 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.
Sellers must disclose certain information
If a contract seller has entered into four or more residential real estate contracts in the 365 days before signing this contract, the contract seller will have to provide certain information:
- The current assessed value of the real estate if the real estate subject to the contract has been separately assessed for property tax purposes.
- Any property taxes due and payable on the real estate as well as any special assessment on the real estate and the term of the assessment.
- If any property taxes or special assessments are delinquent and whether any tax sale certificates have been issued for delinquent property taxes or special assessments on the real estate.
- Any mortgages or other liens encumbering or secured by the real estate, including the name and address of the current owner of record with respect to each such mortgage or lien, as well as the total outstanding balance and due date under any such mortgage or lien.
- A complete amortization schedule for all payments to be made pursuant to the contract, including details on how much of each payment applies to principal and how much applies to interest.
- If the contract requires a balloon payment, a complete description of the balloon payment, including the date the payment is due, the amount of the balloon payment, and other terms related to the balloon payment. Here, a "balloon payment" is any scheduled payment that is more than twice as large as the average of earlier scheduled payments.
- The annual rate of interest to be charged under the contract.
- A statement that the buyer has a right to seek independent legal counsel concerning the contract and any matters pertaining to the contract.
- A statement that the buyer has a right to get a true and complete copy of the contract after it has been executed by all parties to the contract.
- The mailing address of each party to the contract.
- If the contract is subject to forfeiture, a statement that if the buyer does not comply with the terms of the contract, the buyer may lose all rights in the real estate and all sums paid under the contract.
Also, there must be a date on the contract disclosure statement. Each party to the contract must sign it. The contract seller must give the buyer a complete copy of the contract at the time the disclosure statement is delivered to the contract buyer. Within 5 days from the date the contract has been signed by the parties, the seller must mail a correct and accurate copy of the contract to the last known address of each buyer unless that buyer acknowledged in writing that he or she already got the copy.
What can happen if a seller covered by the law discussed above does not comply with disclosure rules?
If the seller does not comply with all these rules, and the buyer can show they were harmed by the seller's failure, the buyer has one year from the date the parties signed the contract to bring an action in the district court where the real estate is located. If the buyers win, the court can give the following relief:
- The court may cancel a contract that remains in existence at the time the action is begun, and order the seller to give back the money the buyer has already paid.
- If the contract has been cancelled by any means prior to beginning the action, (for instance if the seller has forfeited the contract for non payment) the contract buyer may recover a money judgment against the original contract seller for certain damages.
- In an action in which a contract buyer obtains relief under this section, the court shall also award to such contract buyer reasonable attorney fees incurred in bringing the action.
There are some limits on getting this relief. Helping low-income Iowans with basic needs like shelter is a priority for Iowa Legal Aid. Contact Iowa Legal Aid if you have legal problems with housing issues.