Contract financing returns -- with a new, welcome twist

Inflation and escalating interest rates for mortgage loans (if one can find any funds at all) have brought back contract financing with a new twist. Contract financing involves only two persons -- the buyer and seller -- with an attorney real estate agent, or both, as catalyst. No lending institution is involved in the middle.

On a contract sale the seller agrees to "hold the paper," that is, wait for the money to be paid in installments. The buyer pays a substantial amount down and agrees to pay a combination of principal and interest monthly. Most often terms run for 1-, 5-, or 10-year periods -- seldom as long as mortgage loans.

A year-long contract may benefit the buyer who figures he can refinance at a lower rate from a mortgage lender, once interest rates pass their peak. A 5 -year contract may call for monthly payments, plus a large "balloon" payment at the end. By that time the buyer may have accumulated enough additional cash to refinance the remaining principal, or mortgage money may be available again.

As in most good deals, both buyer and seller benefit. The seller may be unable to sell a house because mortgage funds are not available or a buyer cannot qualify because of high monthly payments. A seller who's retiring may welcome receiving high monthly payments for added income.

The buyer may sometimes buy a house on a contract with fewer qualifications than from a lending institution. Also, the buyer may pay less interest. Fewer inspections are required, and this may simplify and speed the contract sale.

But sometimes buying on contract can be too easy. A buyer should still insist on a thorough house inspection. If the buyer is not qualified, he should hire an engineer or building inspector to do the job. The buyer may also hire an independent appraiser or check into current values to ensure that the price is right.

A seller's main responsibility is to make sure the prospective buyer can meet monthly payments by checking income and credit worthiness. A seller can ask a credit bureau to check credit records and get references.

House sales directly between buyer and seller may also proceed with a deed of trust, which is a new twist. With a contract, title to the house remains with the seller until the contract is fully paid. With a deed of trust, the title resides with a trustee for the benefit of the buyer when all terms are met. A deed of trust provides more protection for both seller and buyer in case of troubles, such as the buyer's dying before all payments are made. The seller orders and pays for title insurance, and the buyer pays for recording the deed of trust or contract.

While contract or deed-of-trust documents are relatively simple and so-called standard forms may be purchased at stationery or legal-form suppliers, neither buyer nor seller should complete the sale without getting an attorney involved. Items such as who pays the taxes, standards for maintaining the property, insurance coverage, and other possible conflicts can best be negotiated with the help of a knowledgeable attorney on both sides.