What is a Contract for Deed?
The Contract for Deed is commonly used by low-income people who want to buy a home. A Contract for Deed gives you fewer rights and protections than a mortgage loan, so you should be careful.
Most Contract for Deed sales only need a small down payment. Be cautious with a Contract for Deed that asks for a big down payment. In a Contract-for-Deed, you agree to pay the seller or the seller's real estate agency the full price over several years. You also agree to pay interest on the price. You will receive a deed and full ownership only after the last payment.
Always talk with a lawyer before signing a Contract for Deed. Go to the 'Get legal help' section above to find a lawyer.
What is needed for a Contract for Deed?
You must get a written contract. You can only enforce the agreement with a written contract. The Contract should contain the following information:
- Buyer's name
- Seller's name
- Description of the property (where the property is located; it is best if it has a legal description)
- Permanent index number
- Interest rate
- Mnthly payment amount
- Number of payments required
- Whether a lump sum ("balloon") payment is due at the end
- Your signature, and the seller's signature
You should also make sure the contract has all the terms that you and the seller agreed to, including who will make repairs and who will pay the real estate taxes.
Understanding your payments
It is very important to understand how much you will be required to pay each month. The monthly payment should be clearly stated in your contract. However, you should also understand whether that monthly payment amount includes home insurance or property taxes.
A portion of your monthly payment will be for interest. That means only a portion of your payment each month will actually be applied to the purchase price balance (or principal). It is very important that you understand how much interest you are being charged.
You should also understand whether the monthly payments will fully payoff the purchase price over the length of the contract. For example, if the contract lasts for only 3 years, but the payments each month are based on a 30 year repayment term, the monthly payments will not be enough to payoff the purchase price before the end of the contract. In this situation, a large lump sum (called a "balloon payment") will be due at the end of the contract. You should understand if a balloon payment is requried, and if so, how much it will be.
Should I record the Contract?
Yes. You should record the Contract for Deed in the county where the property is located as soon as possible. Recording the contract helps protect you. Bring the signed contract to the county courthouse to officially record the contract.
You should still record the contract even if it states it "cannot" be recorded. Any provision in the contract that "forbids" you to record the contract is void and not enforceable. The Contract for Deed cannot prohibit you from recording it.
- See the Illinois Dwelling Structure Act: 765 ILCS 70/2
- See the Conveyances Act: 765 ILCs 5/28
Who is responsible for repairs?
It depends. Most of the time, you will handle all repairs after you buy the property. The seller may have to repair certain problems in the home that existed before you bought it if:
- The seller has agreed to make the repairs;
- The seller knew about the defects from city inspections and does not tell you; or
- The seller is guilty of fraud or misrepresentation.
Agreement to make repairs
Sometimes a seller agrees to make repairs. If the agreement is in the Contract for Deed, the seller can be forced to do the repairs. Always get the agreement in writing.
Many houses have never been inspected. If the city found violations of a city code during an inspection of the house, the seller must tell you. If the seller does not tell you about the violations, you can call off the contract. You may also get some of your money back.
The contract should have an express promise from the seller he/she has not received notice of any code violations within that last 10 years. If notices of code violations have been received by the seller, he/she must disclose and list all the notices to you.
- See the Dwelling Unit Installment Contract Act: 765 ILCs 75/2
Fraud and misrepresentation
If the seller lies about the home's condition to convince you to buy it, you may be able to cancel the contract. You may also be able to force the seller to repair certain problems. The written contract should include the seller's statements about the house.
Does the seller have to give me anything else about the condition of the property?
Yes. The seller has to give you a Residential Real Property disclosure. This form makes the seller tell you about any major defects in the property the seller knows about. If the seller says in the report that there is a major problem with the house then you have the right to cancel the contract. However, there may be major problems in the house that the seller doesn't know about or are not covered by the report. The report also doesn't require the seller to tell you about small problems.
- See the Residential real Property Disclosure Act: 765 ILCS 77/55
I heard that I also get a lead disclosure form. What's that?
This tells you if the house has ever been inspected for lead paint. The seller also has to give you a pamphlet about the effects of lead. He has to give you ten days to inspect the house for lead paint. If you find lead paint, you don't have to buy the house. The seller doesn't have to inspect the house for lead, so there still may be lead paint in the house even if he says that the house has never been inspected.
Who is responsible for real estate taxes and homeowner's insurance?
It depends. The contract may specify that the seller will continue to pay taxes. Usually, however, the contract will require you pay for real estate taxes and homeowner's insurance on the property after the sale. You should make sure to pay the real estate tax and homeowner's insurance bills to the right place. Always remember to pay the bills when they are due.
Sometimes the buyer collects funds for property taxes and home insurance from the seller each month as part of the monthly payment - this is an "escrow" account. You should always verify that the seller is actually paying the property taxes and insurance premiums. If you have escrow including in your monthly payments, your payments may increase as insurance premiums or taxes increase.
NOTE: Sometimes the seller owes taxes for prior years. Before signing a contract, you should check to see if any prior years' taxes are owed. If there are unpaid back taxes, the Contract for Deed should specify who will pay them.
How can I prevent the loss of my home?
If you receive a notice of foreclosure or a court summons, you should contact a lawyer as soon as possible. Depending on the terms of your contract, and how much you have already paid, the seller will either have to file a foreclosure lawsuit or an eviction lawsuit to remove you from the property.
The process of foreclosure will apply if:
- The contract is more than 5 years in length; and
- The remaining amount owed is less than 80% of the original purchase price.
Remember, in order to calculate how much of the original purchase price you have actually paid off, you must know how much is applied each month to principal (not interest). Any down payments you made and the monthly amounts for principal should be included, but interest does not count. Be careful to calculate the amount owed and request a payment history from the seller.
- See the Illinois Mortgage Foreclosure Law: 735 ILCS 5/15-1101
If you fail to make payments under a Contract for Deed, the seller can end the contract. The seller must tell you that they want to end the contract. The seller must wait 30 days before trying to go to court and evict you. If you pay what is due within those 30 days, usually the case won't go to court. The contract will continue.
If the case does go to court, you will argue your case in front of a judge. The seller will also argue their case. If the judge rules against you, you may be given a short time to move. You may request the Court "stay" (or "postpone") enforcement of the eviction and give you up to 60 days.
However, if you have paid-off 25% of the original purchase price, the Court will "stay" (or "postpone") enforcement of the eviction and give you up to 180 days (no less than 60 days) to move. This period may give you a chance to keep the contract. If you pay what is due, you may keep the house and continue to pay according to the contract.
- See the Forcible Entry and Detainer Act: 735 ILCS 5/9-110