How To Buy a Home on Contract During a Divorce

During my divorce in 2011, I could not qualify to buy a home with conventional financing because my divorce wasn’t finalized. So I bought a home on a contract. I wanted to buy because renting feels like flushing cash down the toilet each month and a divorce is expensive enough!

I searched for homes where the seller had offered to carry a contract. What this means is that the seller owns the property free & clear and they make the loan for you personally. Sellers will usually request a large down payment for collateral. Usually 20-30% min. Expect to pay a few points higher in interest rates but with no closing costs to the bank, its a wash for the first two years vs. a bank loan. For example if current rates are 6% expect to pay 8% on an owner held contract.

The loan gets amortized for 15-30 years but most sellers ask for a 5 year balloon. This means the remaining balance is due in 5 years. This gives the sellers an option to be paid in full or elect to extend the loan. Since most folks who own homes free and clear are older or its held in an estate, it makes sense they don’t want to hold on to a loan for 15-30 yrs. Before the 5 year mark it’s the responsibility of the buyer to get a new loan from a bank or to sell the property and pay the seller back.

Once you come to terms on the purchase price, down payment, and loan terms the best thing to do is set up your payments with a professional company that will service the note. I called my local title office and they helped me find a reputable company that received my monthly payments, recorded them, and gave both the seller and I statements to track the loans progress.

There are so many great reasons for a Seller to consider selling to a buyer on contract. The #1 reason is the seller can make interest on top of the sales price, maximizing the value of the asset. With so much cash in the market over the past 10 years I expect to see more seller financing opportunities. And with interest rates at 5% + this gives Sellers an opportunity to make 7%+  on their investment.

For buyers going through divorce, bankruptcy, or self employed folks with good savings but low reportable income, and other life events that may keep them from qualifying for a conventional loan, this is a way to purchase a home and create a win-win for you and the seller.