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Common Questions about Buying a Home without a Mortgage

These are common questions about buying a home without a mortgage.

Questions about Buying a Home without a Mortgage

How can I buy a home without a mortgage?

People can buy a home from a private seller with a land contract, lease with the option to buy, or rent to own agreement. However, all of these contracts usually offer fewer protections than a mortgage. To learn more about these contracts, read An Overview of Land Contracts and Leases with the Option to Buy and Rent to Own Contracts.

What are the differences between land contracts, rent to own housing contracts, and leases with the option to buy?

A land contract is a contract between a buyer and private seller for real property that has a home on it. With a land contract, the buyer does not get full ownership of the property. The buyer is an owner, but they only get “equitable title” of the property. Equitable title is the right to obtain full ownership of property. This is different from legal title, which is actual ownership of property. The buyer will not get legal title until the total purchase price is paid.

Leases with the option to buy and rent to own housing contracts are similar, but there are some key differences between the two. A lease with the option to buy is a contract with two parts. First, it is a residential lease. Second, the tenant purchases an “option” to buy the home, according to the terms of the option agreement. This purchase is usually non-refundable. In general, the option agreement will say all of the following:

  • The home price
  • The time the tenant can use (“exercise”) the option
  • Other requirements the tenant must meet before they can exercise the option

Under a rent to own agreement, a tenant pays a monthly fee. Most of it is rent, the rest goes towards the purchase of the home.

Another difference between all these contracts is that with a land contract, the seller can forfeit the contract or foreclose on the home if the buyer breaches (doesn’t follow) the contract. With the other contract options, the landlord-seller could possibly just use the eviction process to get the home back.

What are some of the risks I could face if I buy my home without a mortgage?

If you buy your home using land contract, a lease with the option to buy, or a rent to own contract there are several risks to worry about. Many homes sold using one of these contracts usually have significant repair problems. These contracts often make the buyer responsible for making all repairs to the home during the contract. This is the opposite of a regular landlord-tenant relationship where the landlord has to make all repairs.

Sometimes the seller doesn’t have clean title or any title to the home. This means there could be existing liens on the property or other things that limit a buyer’s rights to the property.

These contracts could also have subordination agreements. These agreements allow the seller to give others interest in the property that is superior to buyer’s.

The biggest risk can come when a buyer breaches (doesn’t follow) the contract. The most common breaches by a buyer deal with payments. If the buyer misses a payment or isn’t able to make the entire monthly payment, these contracts usually give the seller a lot more power than buyers. For example, a land contract could have an acceleration clause, which allows the seller to demand all past due amounts and the remainder of the contract be paid or the buyer could lose the home. With leases with the option to buy and rent to own housing contracts, if a buyer misses a payment, the seller could go through the regular eviction process. This means the buyer could only have 10 days to pay the amount owed or lose their home.

To learn more about the risks, read An Overview of Land Contracts and Leases with the Option to Buy and Rent to Own Contracts.

What happens when the seller breaches one of these contracts?

A common way sellers breach these types of contracts is by refusing to transfer title of the home when the buyer pays off the contract balance. When this happens, the buyer can file a “quiet title” complaint in circuit court. This asks the judge to either order the seller to transfer title to the home or declare that the buyer is the titleholder. The buyer can only do this after making the final payment.  

The buyer could also file a complaint asking the judge to cancel or “rescind” the contract. If the contract is rescinded, the buyer would be entitled to get back money paid to the seller. The buyer would then have to surrender any claim to ownership of the home.

Both of these actions are complex. You may want to speak with a lawyer if you are thinking of starting one of these lawsuits. Use the Guide to Legal Help to find lawyers or a legal services office in your area.

I bought my home with a lease with an option to buy or rent to own contract and now I’m facing eviction. What can I do?

There are unique defenses to eviction in option to buy and rent to own situations. For example, a tenant-buyer could argue that the arrangement is more like a land contract. This means the landlord-seller must file a land contract forfeiture complaint or judicial foreclosure complaint rather than a standard eviction complaint.

There are other defenses dealing with contract law, fair housing laws, consumer protection, and bankruptcy. All of these defenses are complex. If you are facing eviction and your lease has an option to buy, you may want to speak with a lawyer. Use the Guide to Legal Help to find lawyers or a legal services office in your area.

What happens if I bought my home with a land contract and I can’t make a full payment one month?

If you bought your home with land contract, and you breach (don’t follow) the contract, the owner may forfeit (cancel) the contract or foreclose on the home. The most common type of land contract breach by a buyer involves payment issues.

To learn more about this, read An Overview of Land Contracts.

What does it mean when a seller forfeits a land contract?

If the buyer in a land contract breaches (doesn’t follow) the contract, the most common action (called a “remedy”) the seller can take is to forfeit (cancel) the contract. Most land contracts have a forfeiture clause. A forfeiture clause usually says that if the buyer breaches the contract, the seller can keep all money paid to it. The seller can also take back possession of the home. A seller cannot forfeit the contract without a forfeiture clause.

To learn more about land contract forfeitures, read the section “The Seller Can Forfeit the Contract” in An Overview of Land Contracts.