By: Steve Whitlock
Considering selling your mortgage note? Below are five relevant differences to consider between a contract for deed and a mortgage note:
Mortgage: A mortgage is a legal document that is used to place a lien on a property and is recorded of public record. The title is transferred to the new buyer at the time of sale.
Contract for Deed: A contract for deed can be recorded but is not necessary in most states. The title is not transferred until the amount owed is paid off and the terms of the contract are met, hence the name ‘contract for deed’.
Equity: Equity is the difference between the market value of your home and the amount you owe to the lender on the mortgage.
2. Promissory Notes and Terms
Mortgage: A mortgage has a promissory note which is a promise to pay for the property over time. The mortgagee (seller) can foreclose on the mortgage and actually sue the payer (buyer) if the terms of the promissory note are not met. In some cases, the seller can get a deficiency judgment if the property sells at foreclosure for less than the amount owed plus accrued interest, legal fees, and other costs.
Contract for Deed: The terms for most contracts for deed are written into the contract and do not have a promissory note. Although there are some contracts for deed with a separate note, it is the exception and not the rule. In the event of default, it may be easier to foreclose and repossess the property depending on the state or even the county.
For example, I would personally not sell property in Texas on a contract for deed due to very strict laws. Rather, I would use a deed of trust which is very similar to a mortgage.
Mortgage: A mortgage is often utilized for owner financing in cases of a lower loan to values and when the buyer has more equity.
Contract for Deed: A contract for deed is usually used when the buyer has minimal equity in the property and the seller does not want to pass title until there is more equity.
Mortgage: Most mortgages are written by an attorney or title company, where allowed.
Contract for Deed: Often times, contracts are written very loosely or even handwritten. Buyers and sellers should be cautious of these types of contracts. There are many legal issues that must be addressed that can affect the enforcement and sale of a contract.
Always seek legal advice and in my opinion, get all contracts written by a licensed professional such as a real estate attorney!
5. Second Mortgages
Mortgage: A mortgage permits buyers to get a second mortgage from a bank if they qualify by having sufficient equity in the home on the first mortgage.
Contract for Deed: Buyer’s with a contract for deed generally have what is called ‘an equitable interest in the property but no interest of public record’. This does not allow for a second mortgage because there is no equity in the property and the title is not in the buyer’s name. Thus, some rights are restricted with a contract for deed.
It’s always beneficial to work with your numbers ahead of time by using a mortgage calculator. Please feel free to call my office at 1-800-874-2389 if I may assist you in any way!
American Equity Funding