A contract for deed is an alternative nancing agreement in which the seller nances the sale of the property rather than a lender. As with traditional forms of nancing, the buyer takes possession of the home a er the closing of the sale. When buying a home through a contract for deed, the homebuyer agrees to pay the seller the purchase price over time with interest in monthly installments.1 Terms of the contracts vary and may include principal and interest, interest only and amortization periods that are negotiated between buyer and seller, typically about 3-5 years, but rarely for terms of 20 years or more. Contract for deed agreements usually include a lump-sum balloon payment, with the full amount due within several years a er the purchase of the home. Balloon payments require the buyer to pay the full remaining amount due, for which the buyer will need a mortgage loan. A er the homebuyer pays all the payments called for under the contract, the seller is obligated to give the homebuyer a deed to the property. A contract for deed arrangement should not be confused with Rent to Own agreements which allow either party to terminate the agree- ment without the potential for great nancial loss by the renter.
e use of contracts for deed to buy a home is on the rise. e foreclosure crisis has result- ed in tighter loan underwriting standards, leading to fewer quali ed buyers. At the same time, an increase in bank foreclosures means more homes are for sale at reduced prices. Investors o en purchase these homes for cash and then o er them for sale using a contract for deed. Since contract for deed agreements take place without the underwriting criteria set by conventional lenders such as FHA, they are attractive to buyers that are not able to meet these restrictive requirements. Contract for deed agreements are attractive to home sellers because they open up the market to more buyers who, for a number of reasons, can- not nd a mortgage-ready buyer to purchase the property.
Contract for deed financing is a perfect solution to overcome the tough market conditions brought on by the foreclosure crisis and bad credit-Self employed buyers.
If a lender turned the home buyer down for a mortgage this is the best solution.
ADVANTAGES OF BUYING A HOUSE ON A CONTRACT FOR DEED.
Low down payment. Some sellers require only a minimal or no
Homesteading. Purchasing a home by contract for deed gives the buyer the right to homestead and take advantage of certain Property tax bene ts such as the market value exclusion and be- ing eligible to apply for the property tax refund.
Mortgage interest deduction. As the legal owner, the buyer can claim mortgage interest deductions and real estate tax on their personal income taxes. Since contracts for deed typically do not require the seller to provide a year-end statement of interest paid, buyers should keep careful records of their payments.
Less stringent nancing standards. Since it is the seller’s deci- sion, they typically have less stringent underwriting standards than a mortgage loan.
Lower transaction costs. There are no origination fees, points, formal loan applications or high closing costs with a contract for deed. Even if closed by a title company, which is recommended, the costs are much lower than for a mortgage.
Path to home ownership. Structured properly with terms that the buyer can a ord, a contract for deed may be a viable path to home ownership for those with credit challenges.
Potential to improve credit score. Making timely payments on the contract can be a way to improve the buyer’s credit score. However, this will happen ONLY if the seller reports buyer pay- ments to a credit bureau, which most private sellers do not.
CONTRACT FOR DEED REAL ESTATE COMPANY
BOARDWALK PREMIER REALTY INC.