If you’re considering buying a home, you may have come across the term “contract for deed.” This type of contract allows a seller to market their home to a buyer who may not be able to afford a mortgage. It can be tempting to enter into this type of agreement, especially if you’re struggling to save up for a down payment. However, there are some disadvantages that you should watch out for. Let’s look at the main disadvantages of a contract for deed in Texas.
What is a Contract for Deed in Texas?
A contract for deed is between a buyer and seller. The seller keeps the title or deed to the property until you completely pay off the home. This arrangement differs from a mortgage or deed of trust in the level of risk you take on as a buyer. For one, a contract for deed does not have the same protections as a mortgage. In fact, if you default on your payments, the seller may evict you without going through the regular homeowner foreclosure process. Another difference is that buyers don’t generally record their contract for deed with the county. Without a record, it can be challenging to track down the seller if there are any problems with the property.
Disadvantages of a Contract for Deed
Purchasing a home under a contract for deed is risky compared to working with a recognized lender and obtaining a warranty deed. A warranty deed guarantees you a clear title. Your lender’s lien gives you peace of mind about your loan process and legal rights in Texas.
Eviction Without Legal Process
The first disadvantage of a contract for deed is that the seller can evict you without going through the normal legal process for a homeowner. As mentioned before, if you default on your payments, the seller can simply give you a notice to vacate the property. With a deed of trust, the lender would have to go through a lengthy foreclosure process before they could evict you. If you breach a contract for deed, the seller must give you written notice by certified or registered mail and let you know what you can do to remedy the problem. If the breach is for nonpayment, it must state:
- Amount you owe in principal and interest
- Additional charges (like late fees)
- Date of each missed payment
If you’ve paid less than 40% of the total purchase price or made less than 48 payments you have the right to catch up on all payments due within 30 days of the notice. Then if you don’t pay, the seller can file an eviction suit. If you’ve paid more than 40% or made more than 48 payments, or if you recorded your contract in the property records, you have 60 days to catch up on payments. If not, the seller must go through legal means to file for foreclosure. After the sale, the purchaser can file an eviction suit to remove you from the home. (1)
Monthly Payments Lost
If you default on your contract for deed with the seller, they can take back the home while you lose any money you’ve paid toward the house. Let’s say you lived in the home for 15 years, paying faithfully every month. If you don’t pay for a couple of months because of a medical emergency, the seller does not have to go through the legal foreclosure process to evict you. Instead, they can evict you almost like a tenant who quit paying rent.
Refinancing (Changing Your Loan) May Not Be Possible
Let’s say you love the home and decide you want to buy it with a deed of trust with a new lender. You plan to buy the home from the seller using a refinance loan. However, you may face trouble refinancing the property. The reason? Most lenders require that the county record the property in your name. Since contracts for deed are not typically recorded, finding a lender willing to work with you can be challenging.
Paying More For Your Home
You could indeed end up paying more for the property than you would if you had obtained a mortgage. With a contract for deed, there are no regulations on the interest rates the seller can charge. As a result, the seller could potentially charge higher interest rates, which would add to the cost of the home over time.
Many contract for deed arrangements end in a balloon payment after a specified time. So if you’ve paid your contract every month for 10 years, you may still owe half of the home’s value to the seller in a final hefty last balloon payment. However, if you plan to refinance and pay off your balloon payment, you may find no one will refinance. Since you don’t “own” the home (possess the title), you can lose the home for lack of your last payment! And, along with losing the home, you lose the money you’ve invested in the house.
The state of Texas does not regulate contracts for deed. So there is no minimum down payment required and no maximum interest rate. The seller can entice you to move in quickly without a large down payment but can also charge you an interest rate far above national averages.
A Safer Way: Record Your Contract For Deed
A safer way to go into a contract for deed is to file your contract in the county deed records office. You can do this in Harris County at the County Clerk’s Office. Once you’ve filed your contract for deed, the state treats your contract as a warranty deed with a vendor’s lien. In other words, once you file your contract for deed, you have protection from quick eviction. The seller must now go through the legitimate foreclosure process to remove you from the home. If you miss a few payments, the seller must post, file, and serve notice of sale as a foreclosure before starting an eviction process. (1) Recording your deed also protects some from other types of claims or liens in case the title is not clear.
If you’re considering entering into a contract for deed, be sure to weigh the pros and cons carefully. While it can be a helpful way to buy a home, there are some significant disadvantages that you should be aware of before entering a contract for deed. With the real estate market heating up in Houston, you need a professional on your side who can guide you through the different possibilities without losing the shirt off your back. Talking with an experienced real estate attorney can help you see more clearly what you are signing up for.
We Can Help
Whether you’re looking at buying a home with a mortgage or considering a contract for deed, we can help you work through negotiations, agreements, legal hurdles, contract language, zoning issues, and more. If you’re already in a contract for deed and need help finding your way out, at Jarrett Law, we’re here to help. Contact us today to schedule a consultation. We look forward to meeting with you.