Contract for Deed in Texas: Everything You Need to Know
A contract for deed in Texas makes the owner of property retains the deed until the buyer finishes making the installments of the agreed upon purchase price.3 min read
Updated November 3, 2020:
A contract for deed in Texas is a contract between a seller and a purchaser whereby the owner of property or land retains the title or deed until the purchaser finishes making the installments of the agreed-upon purchase price.
What Is a Contract for Deed in Texas?
There are several alternative names for a contract for deed. They include:
- Land purchase agreement.
- Simple land contract purchase agreement.
- Land sale contract.
- Land contract.
A land contract or contract for deed is a real estate contract purchase whereby the seller retains the title or deed of the property until the purchaser can finish making installments of the agreed-upon asking price. Signing a contract for deed is not the same as taking on a mortgage. Rather, a contract for deed can be used as a financing tool when a Texas homeowner wants to sell land or property.
A contract for deed may represent a simple transaction between two parties, however, significant risk can be involved. It is important to understand the process of a contract for deed agreement. First, a buyer and seller must agree upon the terms of the contract and the sale price. The negotiated terms will vary with each contract. However, a contract for deed will typically require set monthly payments and a down payment to be made.
Additionally, the contract usually stipulates that the buyer must make payments to the seller without taking on a mortgage. During the negotiations, the seller should present the warranty deed to the buyer to verify that they own the title and property. Seller financing or owner financing is a process used when a buyer cannot gain financing through more traditional methods. Instead, the buyer must make direct monthly payments to the property owner.
When Should You Use a Contract for Deed?
If a property seller is managing the financing for the real estate purchase, using a contract for deed is recommended. This means that the purchaser will be making monthly installments to pay back the loan. There are several instances when a contract for deed is normally used. They include:
- When a buyer has a poor credit rating and is unable to get financing from a professional lender.
- When a buyer has a sporadic employment history.
- When a buyer has a high personal debt to income ratio.
- When a buyer has changed his/her employment situation.
- When a buyer has insufficient funds for a down payment or to use as collateral.
How Do I Determine Payments?
In a contract for deed, part of the monthly installment will go toward paying the interest owed, and part will go toward paying the principal. This is similar to a typical mortgage process. It is recommended to contact local mortgage brokers or financial institutions to learn what interest rates lenders are currently charging. This will help calculate a fair interest rate and determine the appropriate payments.
What Is a Purchase Default on a Land Contract?
Generally, purchase defaults will include the following conditions:
- When the purchaser is late on a payment, there will be a notice period to rectify the default. During this time, a late fee will be added with the amount already predetermined in the contract agreement.
- If a purchaser does not remedy the default, only a limited time will be allowed to pay off the remaining balance. Additionally, the individual will need to vacate the property. The agreed-upon timeframe will have already been established in the land contract.
- If the purchaser can rectify the defaults that have occurred, then the contract can be reinstated if the seller agrees. However, the right is at the seller's discretion. Due to this stipulation, both parties must agree to reasonable repayment terms to decrease the chance that the purchaser will default.
Property Titles in Texas
In the state of Texas, one of the biggest differences between purchasing real estate with a contract for deed versus using a traditional mortgage is the time frame needed for the property title to transfer. When working with a traditional mortgage loan, the purchaser will typically obtain the property title at the closing.
The mortgage company will hold a property lien, and the purchaser will hold the title to the property until the purchaser pays off the mortgage. However, in Texas, a contract for deed will impede the property title transfer. To clarify, only after the buyer completes the terms of the contract will the title transfer for the contract for deed.
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