Selling a home on contract if you can’t get a reverse mortgage
An option available to seniors who need immediate cash and/or regular income, don’t mind moving out of their current homes and can’t qualify for a reverse mortgage is to sell their house on contract.
Also known as a contract for deed, a bond for deed or an installment land contract, selling your house on contract financing at least a portion of the purchase. The new homeowner makes installment payments directly to the seller for an agreed upon period.
In legal terms, the seller retains legal title during the contract term, while the buyer gains equitable title. This essentially means that the buyers will not get a deed to the property until they have fulfilled the terms of the contract, but in the meantime, they have an ownership interest in the property.
If the buyer meets the obligations of the contract, the seller must term over the deed. If the buyer defaults at any time, the contract is typically canceled and the seller takes back the home and keeps any payments made up to that point.
The two parties can negotiate the terms of the contract, including:
- The purchase price
- The term of the contract, after which the remaining balance will be due
- Downpayment amount
- The amount of the monthly payment
- Interest rate
- The amortization schedule
There are several reasons why selling your home on contract may be an appealing option.
You cannot obtain a reverse mortgage on the property
There are many reasons why a reverse mortgage isn’t an option. You may not meet the age requirement (at least 62), your property may not meet the Federal Housing Administration’s Minimum Property Standards, or you may not have enough equity in the home to qualify.
You need a certain type of buyer who can’t obtain traditional financing
One of the primary candidates for selling a home on contract is that the property may only appeal to buyers who cannot obtain traditional financing. This usually means that the home is valued at the lower end of the local real estate market, and the prospective buyers don’t have the resources for a 3 percent downpayment on an FHA loan, nor meet the credit and income requirements of traditional lenders.
Selling a home on contract is a way to create a larger pool of buyers. Most buyers who would consider a home on contract are more concerned with the size of the monthly payment and other terms than with the overall value of the property.
At the same time, you are taking on a financial risk that traditional lenders are not willing to make. But as covered above, the contract can stipulate that you take back ownership of the property if the buyers do not meet their obligations.
You save time and costs
If you sell your home using the traditional process, the transaction is slowed by the involvement of a third-party lender. The buyer will have to undergo a complete credit and income assessment, and the underwriting process will also entail significant review of the property itself, from appraisal to inspection.
Also, most of the transaction process costs are typically paid by the buyer, the seller may incur some as well in the traditional transaction. Furthermore, if you use a real estate agent, the seller will have to pay a percentage of the sale price as a commission. These costs will not be incurred by selling the house on contract.
You can delegate responsibility for taxes and maintenance
The terms of the contract will most likely dictate that, as the new owner of the home, the buyer will be responsible for property taxes, homeowners insurance, and maintenance of the property, just as they would be had they gone through traditional financing.
On the other hand, if you choose to keep the home and obtain a reverse mortgage, you will maintain responsibility for all of those expenses and can lose the home to foreclosure if you don’t.
But if you still owe on your conventional mortgage…
Having a balance on your mortgage makes selling on contract more difficult. Unless you can obtain a downpayment large enough for you to pay off the balance on your mortgage, it may not be possible.
That’s because mortgage contracts typically include a due-on-sale clause, which states that if you sell your property or an interest in it, the mortgage is immediately due and must be paid in full.
A reverse mortgage, on the other hand, can be used to repay the balance of your existing mortgage. Even if after paying off the existing mortgage you have little to no funds available from the reverse mortgage, it might still be an option if your goal is to get rid of a high monthly payment and be able to use more of your income for other expenses.
Another option if you still owe on your existing mortgage and can’t sell the property outright is to enter into a lease-to-own contract. This is an agreement where you rent the home to a potential buyer who then has the option to buy it at a specified date in the future, under agreed upon terms. Typically, however, since you have not sold the property, you are still responsible for taxes and property insurance until you execute the purchase part of the agreement.