Home financing translated into English that a normal person can understand….Part Seven
In the past we have looked at FHA, DVA, USDA, Conventional, and 203K Renovation loans as well as the mortgage assistance programs offered by AEOA and KOOTASCA. These are all bank or mortgage company lending programs and one of them will work well for most buyers. However, there is another option – owner financing – usually accomplished through the well-known and capable contract for deed.
A contract for deed, or C.D., is a financing tool that can allow buyers who don’t qualify for traditional lending options to purchase property. However, both buyers and sellers incur risk with this method of transferring real property and both buyers and sellers should seek legal advice before entering into a purchase agreement using contract for deed financing. Under a C.D., the buyer makes regular payments to the seller until the amount owed is paid in full or until the buyer finds another means to pay off the balance. The seller continues to hold legal title to the property until the debt is paid off. If the buyer defaults on the payments, the seller can repossess the property.
Many buyers view a C.D. as an easy way to buy property, and it can be a valid vehicle for purchase, but there is more to a C.D. than many people realize. Before getting excited about a contract, a buyer needs to ask and answer at least 5 questions:
- How much are you offering for the property?
- How much of a down payment are you willing to make?
- How much will your monthly payments be?
- What interest rate are you willing to offer on the unpaid balance?
- How long will the contract run?
The main advantages of a contract for deed include:
*No bank scrutiny
*Bad credit is not necessarily a problem
*An appraisal may not be necessary
*Quicker closing date is often possible
The main disadvantages of a contract for deed include:
*There is a risk of title issues if any clouds exist or develop during the contract
*Generally down payments are higher with a CD than with traditional financing
*Generally interest rates are higher with a CD than with traditional financing
*The length of a contract is negotiable, but typically shorter is preferred over a longer period. The national average is 5 years
*At the end of the contract period, the balance is due in full. If the buyer cannot pay the “Balloon” payment when it comes due, he risks losing the property and all money invested.
* Many sellers do not want to wait for their money so they reject a C.D.; Also sellers that have a mortgage on their property probably cannot accept a C.D. even if they would like to.
Throughout this blog series we have been telling buyers to make sure they are working with a good, knowledgeable lender. With a contract, no lender is involved, so in this case buyers need a Realtor with knowledge and experience dealing with a contract for deed. Both buyer and seller need to get legal advice before signing a purchase agreement that includes a C.D. And both buyer and seller should work with a good title company and/or attorney to draft the C.D. after an agreement has been reached.
Check our website at www.johnsonhometownrealty.com to see any of our previous financing blogs, and stop in to visit us at 2402 First Avenue, Hibbing or call us at 218-263-4411 anytime with questions! A big thank you to Vicki Carlson and Keri Clark of Sellman Title Company for their input on this topic!