Understanding the Differences Between Contract for Deed and Mortgage

When it comes to property financing, contract for deed and mortgage contracts are two very different agreements. In the simplest of terms, a contract for deed is an agreement between the buyer and seller of real property that essentially allows the buyer to make payments to the seller over time in exchange for the right to occupy and use the property – kind of like leasing to buy. The contract denotes that the seller will retain “title” to the property until the buyer has completed the payment terms and paid the purchase price, at which point the seller will be obligated to relinquish the property through a deed.

A mortgage contract is a simple note and deed combination that documents the amount of a loan between a borrower and lender -typically a bank or financial institution -and grants the lender the right to foreclosure or property restitution in the event of loan default. The two agreements differ most notably when it comes to factors like legal control of the property, property title, rights of the parties and remedies for default. The biggest selling point for many buyers is that contract for deed agreements does not require a credit check. Should a contract for deed be converted into a mortgage? Generally speaking, there are sound legal reasons for doing so. While contract for deed agreements are legal in most states, they are still considered risky options for financing a property purchase because they can have serious legal implications for both the buyer and seller. If the buyer defaults on the agreement, he or she can be evicted from the property and forfeit all payments to date. For sellers, a foreclosure action is not always the most desirable property restitution option. Some mortgage lenders may refuse to finance the buyer through conventional means based on their current contract.

In most cases, converting the contract for deed to a mortgage is a smart way to benefit from the aforementioned legal advantages. The process of converting a contract to a mortgage includes four basic elements. As always, turn to an experienced legal professional familiar with contract law in your area to help you determine whether this type of change is right for you. While closing costs for converting a contract to a mortgage are typically less expensive than those for a new mortgage, they are not always minimal. In rare cases, especially if anyone in the parties involved in the transaction have particularly bad credit scores, the lender may require the buyer to pay a higher interest rate for the new mortgage. This can result in a significant overall cost change to the mortgage agreement.

In many cases, converting a contract for deed to a mortgage can be beneficial to all parties involved, but there are certain legal risks still inherent to the process. In most cases, these risks can be mitigated by developing an expert-level understanding of contract law, mortgage law and all other areas of the transaction relevant to local laws in your area. As such, many borrowers are well-served by consulting with an attorney and obtaining an independent appraisal of the property prior to converting a contract to a mortgage.