Buying a Home on Contract in Iowa

Most people borrow money from a bank to buy a home. This is known as a mortgage loan. However, for various reasons, you may not qualify for a traditional loan. You may have bad credit history, low income or be purchasing multiple properties as investments. For those who cannot get a traditional mortgage loan, they might choose to purchase a house on contract.  

In this article, we cover how to buy a home on a contract in Iowa. We discuss the following questions:

• What is buying a house on contract? 
• How is buying a house on contract different from renting or buying a house with a mortgage?
• What considerations should I make when buying a house on contract? 
• What rights do I have if I buy a house on contract? 

What is buying a house on contract? 

Buying a house on contract means that you are entering into a contract to purchase the house with the seller. The buyer and seller agree to various terms in the contract including purchase price and payment terms. The buyer usually agrees to an initial down payment then a number of regular payments. After the buyer makes all payments and completes other obligations outlined in the contract, the title will then transfer from the seller to the buyer. This process is also known as seller or owner financing.  

How is buying a house on contract different from renting or buying a house with a mortgage? 

Unlike a rental, where the landlord is responsible for maintaining the property, when you purchase a home on contract the seller is not responsible for maintenance even though they likely still hold the title. The responsibility  is on you.

There are, however, a lot of similarities between buying a house on contract and a mortgage. You make regular payments just as you would a mortgage. However, there are a number of key differences worth noting. 

First, most contract sales of homes have a forfeiture clause. This means that you lose your right to the home if you don’t make the required payments or don’t follow other terms of the contract. Should you forfeit your contract, the seller often not only gets to keep the home and all payments made but also gets to keep any and all improvements made to the property while under contract. Compared to mortgages with many legal protections in the instance of delinquency, there are few to none with buying a home on contract. Additionally, with a mortgage loan, you get to keep any equity in your house following forfeiture.  

Second, most contract sales of homes include a “balloon payment.” A balloon payment is when a buyer makes regular monthly payments for a term then, following that term, the remainder of the debt comes due all at once. This large payment is known as a balloon payment. Most mortgages do not have such a payment, instead allowing you to continue making regular payments until the debt is paid off.  What happens in most circumstances for those who are buyers under contract is that they attempt to find a loan (typically a mortgage) to cover the balloon payment when it comes due. If they are unable to do so, these people are often unable to afford to keep their houses, and face losing them.  

What considerations should I make when buying a house on contract? 

It is important to have a good house from the start. Ensure the home has no major issues through an inspection before you agree to the contract. This will prevent you from being stuck with the costs of maintenance.  

Another consideration to make is to look for any liens on the property. You can search for liens by having a title opinion done. The title opinion will look for and uncover any problems that might affect the ownership of the property.  

Finally, you should always review your contracts prior to entering into them (signing them). The significant cost of a house makes this especially important. You want to know up front what the total cost of the house is, which party pays taxes, what the interest rate is and what the balloon payment is. Careful analysis of these contract terms are necessary to determine if you are making a smart financial decision.  

What rights do I have if I buy a house on contract? 

After buying a house on contract, you need to make sure the buyer records the contract with the county recorder’s office within 90 days of signing it. This is required by law (in cases where the seller has sold at least 4 residential real estate contracts within a year, the period drops to 30 days). If your contract is recorded, you can be notified of any bankruptcy proceedings against the seller or any other actions against the seller that could affect your interest in the home. 

If you have missed payments on the contract or have breached the contract’s terms, you must take certain steps to avoid losing your rights under the contract. The seller must serve you notice of the default. Following that, you have 30 days to remedy the default. Should you not remedy the default within 30 days, the contract is forfeited and the seller is entitled to take the house back and keep the payments and improvements made. Following the forfeiture, the seller has 30 days to evict you as a “holdover tenant” by filing an eviction proceeding so long as the contract includes a holdover tenant clause allowing for summary eviction (many include this provision). If the seller doesn’t start summary eviction proceedings within 30 days after the forfeiture, or if the contract doesn’t have a holdover tenant clause, the seller will have to use a longer eviction proceeding to evict you.  

For sellers who sell multiple properties in a year or the seller uses a broker, there are a number of additional rules the seller has to follow that benefit buyers. These rules require sellers to ensure that the buyer is able to repay the loan, to give you notices, and regulates what terms are and aren’t allowed in the contract. These rules come from the Home Ownership and Equity Protection Act (HOEPA), the Truth in Lending Act (TILA) and other state and federal regulations. Be sure to keep all notices and documents from the seller should you be working with a seller who falls under these regulations to ensure their compliance. Should these rules apply to the seller and they violate them, you have remedies including but not limited to damages, attorney fees, and the right to cancel the contract.  

Buying a house on contract isn’t for everyone. However, for some, it’s a way for them to purchase a home. If you decide to enter into a contract, be sure to review the contract and understand your rights before entering into it.