Federal Update: New Contract for Deed Rules

Contracts for deed – sometimes called installment contracts, land sales contracts, or owner carry – leave the deed until the borrower pays for the home in full. Until then, the borrower lives in and maintains the home.

This is a type of seller-financed home sale – and it’s one way to avoid getting entangled with a bank. Some people decide to buy a home in installments because they’re unable to get a loan. And some faith-based communities avoid paying interest on money for religious reasons. But there’s a bitter irony here, as professional sellers charge higher rates than banks. They just don’t call it interest.

All in all, making a contract for deed, statistically, puts a buyer at a higher risk of default than a regular mortgage loan. So, the U.S. government now says mortgage protections apply to contracts for deed. Here, we describe the good, the bad, and the ugly contracts for deed — and why the government had to step into the fray.

For Some, It’s the Homeownership Ladder’s First Rung.

Imagine renting for years. Building a rapport with the property owner.

Ultimately, the owner wants to sell the property and move on to other things. So you’re offered an opportunity. Would you want to buy through installments?

You’ve never felt ready to apply for a bank loan. You’ve been dealing with credit issues for a while. But now, you could make regular payments on a home, fix the place up the way you like it while you purchase it over time, and build up equity that’ll belong to you, once you get the deed.

Finally, you’re on the ladder. You can refinance with a regular mortgage at the end of the contract. You could even aim to buy another home — this time, through a traditional mortgage.

That’s a good story, and stories like this can and do unfold. Some nonprofits, like some individuals, depend on contracts for deed to help people with modest incomes become homeowners.

What Could Possibly Go Wrong?

Contract-for-deed sellers keep the deed until the buyer finishes the agreed-upon series of payments. But for some of these sellers, it’s just a transaction. It’s their business.

Investor-sellers can toss their buyers out over a missed payment. Plus, the bloated interest rates on a lot of these deals make repaying the money much harder. And without an institutional mortgage lender in the mix, many of the buyers aren’t getting crucial services like title searches, appraisals, and inspections. So, the necessary repairs can take households by surprise. And there could be liens on the title — old or new.

Some investor-sellers make these deals in the hope that the buyer will fail. They then take back the home and sell it again. These shenanigans displace real people, including households with seniors, people with disabilities, and kids.

Contracts for deed have operated without much oversight. So, if professional sellers deliberately trip up a buyer, there might be no recourse to the law.

Buyers are usually expected to fix the maintenance issues they discover as residents. Hoping to acquire the deeds, the buyers wind up investing serious funds in their homes. And though the buyer gets to live in the home, it’s the seller who can take a loan out against the title. Buyers pay property taxes, too, although they don’t hold their own deeds. All this, and to have the rug pulled at a moment’s notice?

Yes, it happens all too often. Contracts for deed have shorter terms (five years, typically) and higher interest rates than regular mortgages, and they have balloon payments at the end. All this can overwhelm a household’s finances.

But why has this issue suddenly come to a head? According to reports by the Sahan Journal in collaboration with ProPublica, abusive contracts for deed have proliferated in St. Paul’s Somali Muslim population. As we noted earlier this year, the predatory pattern became increasingly hard to ignore.

Now, this game has rules.

What Do the New Rules Say?

Effective since August 2024, new federal rules allow buyers extra time to make up overdue installment payments. Now the home seller needs to provide 30 days’ notice to the buyer that a new, 90-day cancellation period has started. (Previously, to use Minnesota as an example, sellers could cancel their contract after just 60 days of buyer nonpayment. When a seller cancels, the buyer forfeits the home and is forced to leave.)

And the new rules direct sellers to record these contracts with the county deed recorders’ offices. If sellers neglect this step, they can’t cancel the contract. This removes one key task from a buyer’s to-do list. Many buyers never got it done. (Before August, only the buyers in the state of Minnesota had to, by law, record the contract.)

There are other new provisions, too. And the federal government says the Truth in Lending Act applies to investor-sellers. So, sellers must determine buyer’s ability to pay what the contract expects, and they must tell their buyers what their contracts really say. They must clearly disclose percentage rates and provide amortization charts.

A buyer now has ten days to back out after receiving all disclosures. During the first four years, if the seller cancels, a buyer can get back down payment money (minus 10% of the home price). And if a seller doesn’t comply with the rules, the buyer can sue and get attorney fees paid.

The fed’s guidance is geared to keep investor-sellers in check. That is, the feds are watching for the sellers most likely to issue exploitive contracts and churn homes. As we go to press, Minnesota’s Sen. Tina Smith and Wyoming’s Sen. Cynthia Lummis are hammering out U.S. federal legislation to regulate contracts for deeds and afford a degree of foreclosure protection for the buyers.

How Big Is This Issue?

Across the country, more than 8 million homes have been sold with the seller holding the deed until repayment. The main states with this type of transaction are Minnesota, Michigan, Ohio and Wisconsin. We hear a lot in the news about Minnesota buyers using contracts for deed, because of the widespread use of risky and unfair contacts there. Yet the top state for contracts for deed is Michigan, with more than 110,000 recorded. There are, no doubt, many more. The Pew Charitable Trust believes that there are some 200,000 unrecorded contracts for deed exist.

Wherever You Live, Proceed With Care

The Consumer Financial Protection Bureau has announced that federal consumer protections do cover contracts for deed. Know your rights. Whether you buy or sell, proceed carefully. Have a lawyer draft your contract — this is essential if you’re doing seller financing.

More to come as the federal law and policy-makers keep at it… As always, we’ll keep our readers posted.