Many would-be homeowners apply for a mortgage only to discover that they've been denied for home financing despite actually having the necessary funds. There are many reasons mortgage lenders reject a home financing application, and some of them are out of your control.
If this has happened to you, fear not! Buying a home via NJ real estate "contract for deed" can help you realize your home ownership dreams when traditional financing is not a possibility.
In a contract for deed, the seller finances the purchase of the home, as opposed to a third-party lender. Also known as a land contract or an installment sale agreement, it is a direct agreement between the buyer and the seller in which the buyer agrees to pay the seller an agreed upon monthly payment to eventually own the home. Often these agreements allow the buyer to take immediate residency in a home without a down payment. Buyers can also avoid lengthy closing procedures as well as expensive closing costs and application fees. The seller keeps in their possession the legal title to the property until the payment schedule is completed while the buyer enjoys the right to occupancy as they make payments.
It should be noted that while there is an attractive ease to this option, it is not without risk for both the buyer and seller. Important information includes:
- Buyers have very limited legal protections under this contract.
- Buyers will not have full ownership rights, but are required to make repairs, pay taxes, and keep up with monthly payments to the seller.
- The seller has the rights to the title throughout the life of the contract.
- The seller can attempt termination of the contract if the buyer misses a payment.
- The buyer will only have 60 days to address a default before the house can be taken, whereas a traditional mortgage lender would typically allow the buyer six months.
- The seller can offer a property under contract for deed without disclosing the condition of the property, leaving the buyer with little to no collateral if the home is in poor or unsafe condition.
- Sellers can have a mortgage of their own on the property while under a contract for deed (CONFUSING, RIGHT?) as long as it is paid off by the time the title transfers to the buyer.
There are steps buyers can take to minimize the above risks. If you're interested in a property via contract for deed and you discover the current owner has a mortgage, check with the lending company to see if the loan is current. Ensuring the contract is clear and responsibilities for both parties are outlined in detail can save a lot of headache down the road. Having an experienced real estate firm like Veitengruber Law review your contract for deed can also help you protect yourself legally.
As long as you approach with caution and are armed with knowledge, a contract for deed can be a great way for you to realize your dreams of home ownership even if you don't qualify for a traditional mortgage.