Because of credit tightening, some homebuyers are less likely to qualify for mortgage than they were just a few years ago. Some financial counselors predict that borrowers with limited options will turn to alternative means of purchasing a home. One such alternative is the contract for deed.
In a contract for deed, the purchase of property is financed by the seller rather than a third-party lender such as a commercial bank or credit union.
The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan.
Facts and features
A contract for deed, also known as a "owner financing," "land contract," or "installment land contract," seller financing”is a transaction in which the seller finances the sale of his or her own property. In a contract for deed sale, the buyer agrees to pay the purchase price of the property in monthly installments.
The buyer immediately takes possession of the property, often paying 10% to 20% down, while the seller retains the legal title to the property until the contract is fulfilled. The buyer has the right of occupancy and, in states like Minnesota, the right to claim a homestead property tax exemption.
The buyer finances the purchase with assistance from the seller, who retains a security in the property.
The contract for deed is a much faster and less costly transaction to execute than a traditional, purchase-money mortgage. In a typical contract for deed, there are no origination fees, formal applications, or high closing and settlement costs.
Another important feature of a contract for deed is that seizure of the property in the event of a default is generally faster and less expensive than seizure in the case of a traditional mortgage. If the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the property, and keep previous installments paid by the buyer as liquidated damages.
Under these circumstances, the seller can reclaim the property without a foreclosure sale or judicial action. However, laws governing the contract-cancellation process differ from jurisdiction to jurisdiction and the outcome may vary within any one state, depending on the contract terms and the facts of the specific case.
Because the buyer in a contract for deed does not have the same safeguards as those afforded a mortgagor in a purchase-money mortgage, the contract for deed may appear to be essentially a rent-to-own arrangement.
With contract for deeds, the buyer becomes responsible for the obligations of a mortgagor in possession, such as maintaining the property and paying property taxes and casualty insurance. In addition, unless prohibited by the contract, either party may sell his or her interest in the contract.
Homebuyers may be attracted to a contract for deed purchase for several reasons. This method may be especially appealing to homebuyers who do not qualify for a mortgage, such as people who work cash jobs –self Employed-had a bankruptcy or short sale in the past-Medical bills out standing-low credit scores-relocating-Buyer owns more than one home -unable to prove their ability to make payments.
Since the contract for deed process is significantly shorter than the mortgage-approval process, it may attract buyers who face time constraints or have limited options, such as people who are in the process of losing their homes to foreclosure.
Contracts for deeds are a more popular financing alternative among minority homebuyers, most notably Hispanics. According to figures from recent American Housing Surveys, while only 5 percent of all owner-occupied households in the U.S. had contracts for deed in 2005, 9.5 percent of Hispanic owner-occupied households and 7.1 percent of black owner-occupied households across the country used them.
Minnesota state laws the owner/buyer must record the land contract.
Before the rise of subprime lending in the 1990s, many buyers who were unable to qualify for traditional financing resorted to contracts for deed.
MN farms-acreage-raw land-lake lots are commonly sold on a contract for deed.
The reason for MN farms for sale contract for deed is it is hard to get a mortgage on raw land most lending institutions do not want to give a mortgage on land with out a structure.
Farm houses usually don’t have a lot of value it is all in the land.
MN lake properties for sale can be another tricky property to get financing being the value is in the lake shore-frontage not the home.
In Minnesota, when a buyer falls behind on payments, the seller can file a Notice of Cancellation of Contract for Deed with the county and serve the buyer with the notice. The buyer has only 60 days from the date of the filing to address the items of default and pay the allowable attorney fees to "reinstate" the contract.
There is a balloon payment, the buyer will need to obtain a traditional mortgage-or sell the property with in the time payment of the land contract.
Most buyers enter into contracts for deed with the hope of repairing their credit.
They expect to improve their credit profile during the first part of the contract period and then qualify for a loan at the time the balloon payment is due.
If the home buyer continues to make payments on credit cards or car payments their credit should go up as long as they do not have late payments. With FHA mortgages the buyer will need a credit score around 620-640 to qualify to a new mortgage and refinance the contract for deed.
You may have heard of
The Bridge to Success Contract for Deed Program, launched in fall 2008.
Through this program, the Family Housing Fund made a $500,000 loan to Dayton's Bluff Neighborhood Housing Services (DBNHS) and Greater Metropolitan Housing Corporation (GMHC). These two organizations have a lender commitment—similar to a line of credit—of up to $1 million from a private lender. DBNHS and GMHC will use the funding pools to sell properties on a contract for deed to homebuyers who may not be ready to qualify for a traditional mortgage. The funds from the Family Housing Fund will make up 20 percent of the purchase price, with a balance of 80 percent funded by lenders. This arrangement eliminates the need for private mortgage insurance. Key components of The Bridge to Success Contract for Deed Program are homeownership education and financial counseling to ensure that the buyer is mortgage-ready in three years.
THE DRAW BACK TO THIS IS IT IS ALMOST LIKE GETTING A MORTGAGE WITH A LENDER. THEY HAVE STRICT GUIDELINES COMPARED TO GOING WITH A TRADIONAL CONTRACT FOR DEED WITH AN OWNER/SELLER.
How do I know this I have looked at several of these homes with clients who had 20% down of the sale price but didn’t not qualify for the contract for deed program.
We then went to other properties listing cd and sold them a property that I thought was a better deal.
MN Seller will set forth the terms of the contract in a purchase agreement. It is important that both parties fully understand the provisions of the contract, because once the purchase agreement has been signed, the options available to both the seller and buyer are limited.
The contract will state if buyer or the seller is responsible for property tax payments and insurance and whether the contract for deed includes a balloon payment. Almost all contracts have a balloon payment.
The buyer should also make sure that the seller is the true owner of the house by closing with a title company or law office who with check the county for them.
The buyer should ask the seller for a Truth in Sale of Housing report to determine the condition of the house. This report is required in Minneapolis and St. Paul and some other cities.
In cities where it is not required, the buyer should find his or her own inspector to assess the condition of the home.
Protecting their interests in contracts for deed, sellers and buyers must do their homework.
Make sure they learn and understand what specific provisions and risks the contracts entail. Buyers in private contracts for deed should take additional steps. These include assessing the condition of the property, confirming that the seller has clear title, and recording the signed contract at the appropriate government office. By being informed and prepared, the buyer and seller in a contract for deed can help ensure a positive outcome for both parties.
What type of properties can a buyer purchase with a contract for deed in MN?
The following are good candidates for owner financing.
Condo-town homes-single family Real estate-Farms-Hobby farms-cabins-lake homes-any type of property with water or access-pond-river-Duplex-investment-rural or suburbs.
Basicly all real property can be bought or sold on a land contract.
For more information on contract for deed homes for sale go to our web site to view the listings or call us today.
BoardWalk Premier Realty INC