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Contracts for deed and the dangers of alternative mortgages

If you're living in a situation where you don't have a lot of spare money, one thing you may be considering is purchasing a home. How can that make sense when you're already pushing your limits in a rental? Simply put, owning a home means you're putting money into paying off "good debt," and that you may be able to get that money back out of your home if you decide to sell it.

The problem some people run into is that they take on home ownership as a kind of gamble. They may not have a normal mortgage, taking on a contract for deed. What is a contract for deed? Essentially, an individual enters a contract to perform certain duties for a certain length of time. When those duties are completed, the home's deed is transferred into his name.

A contract for deed arrangement is very common in low-income communities, but it's not as good as buying a home through traditional loan processes. There are rarely real-estate agents or attorneys involved, and this in itself can cause problems. Homeowners in these contracts don't get a deed until they finish the last payment, and they still have to maintain the property and pay property taxes. No equity is built while they're in the property, and if they happen to miss a payment for any reason, it's possible that they can lose the entire home and all the money they spent on it, just like a normal rental unit.

Buying a home with a contract for deed is risky, and if you think you might do so, having your attorney walk you through the legal protections you have or don't have is important to protecting your rights as a buyer.

Source: PBS News Hour, "Here’s why low-income households may gamble with homeownership," Sophie Quinton, June 01, 2016

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