Attorney Mary PoolRecently, I met with a couple who was behind on payments under their bond for title contract.  They were concerned because the contract allowed the seller to void the contract and treat the contract as a month to month lease instead of a sale if a default occurred.  Understandably, this couple was upset because they paid upfront a large down payment on the property and had made payments on the home for a number of years.

Bond For Title

For those who are unable to qualify for a conventional mortgage, a bond for title may seem appealing since it is a way for you to invest in a home through owner financing instead of just paying rent.  A bond for title is an installment sales contract where the owner is financing the sale of property but not transferring title of the property to you until the terms of the contract are complete.   If you are considering entering into a bond for title, it is important for you to understand what risks are associated with such transactions.

Risks of a Bond For Title

1. Seller has mortgage on the property

If a seller still has a mortgage on the property that they are now trying to sell to you, then two major issues arise.

Due on Sale Clause

The first issue is the seller’s mortgage company likely has a due on sale clause written with the mortgage contract with the seller.  A due on sale clause means that the entire mortgage balance becomes due if the seller does anything to jeopardize the mortgage company’s rights to the property.  A bond for title is one of the types of transactions that a due on sale clause is designed to prevent.

Trusting the Seller

 The second issue is trusting the seller to use the money you pay to him to pay off his mortgage.  If you enter into a bond for title, you do not want to pay a large down payment and be paying on the property for a period of time only to discover that the seller was not paying his mortgage payments and the home is going to be foreclosed upon by his mortgage company.

Do your homework

Do not rely on the seller’s word on whether there is a mortgage on the property.  Instead, do your homework by going to your county probate office and researching whether there are any mortgages or liens placed upon the property address.  If there are liens or mortgages then you really need to think twice about entering into a bond for title on that property unless you are willing to take the risk.

Clause May Allow Seller Option To Void Contract And Convert To Lease

 Most bond for title contracts in Alabama have a provision that allows the seller to void the contract and treat it as a month to month lease if you default on your installment payments.  If you never are late on payments then this clause would not be a problem for you.  However, circumstances may change that cause you to default on the payments and if you do and the seller notifies you that he is treating the contract as a month to month lease then you really have no rights to enforce the sale unless you can prove to a court that the seller did not enforce strict compliance of this clause (meaning you have been late before and he has always accepted payments late).  To prove the clause should not be enforced requires a court to become involved and answer the question of fact whether the seller relied on the clause or waived it be accepting payments late in the past.

You Do Not Obtain Title Until All Terms Are Completed

 With a bond for title, the title of the property does not transfer to you until you complete all payments/terms of the contract.  The risk involved here is if the seller dies then you may have multiple heirs to deal with to determine who you pay to complete the terms and who will transfer title to you once you have performed all the terms.

Consider Owner Financing Instead of a Bond for Title

As an alternative to a bond for title, try to have an owner finance the mortgage for you so that the title is transferred into your name at closing and the seller will take a mortgage on the property until the loan is paid in full.  If you were to default on the loan, the seller would have to foreclosure on the property instead of converting the contract to a lease (see risk #2 above).  In order to do owner financing, the seller would have to own the property free and clear to be able to transfer the title to you which would eliminate any risks of the seller having a mortgage on the property you are buying (see risk #1 above).

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