A Contract for Deed Question and Answer Session for Home Buyers
Question: What is a Contract for Deed?
Answer: A contract for deed is an alternative financing agreement in which an individual seller or investor rather than a lending company finances the sale of the property. As with traditional forms of financing, the buyer takes possession of the home after the closing of the sale. When buying a home through a contract for deed, the home buyer agrees to pay the seller the purchase price over time with interest in monthly installments.
Question: How is a Contract for Deed different than a traditional mortgage that a buyer would get through a lender?
Answer: A Contract for Deed is usually structured with a balloon payment after 3 - 5 years. This means that the balance of the principal on the home is due. It's unlikely that the buyer will have the cash available to pay off the loan and at this point, most home buyers will seek a traditional mortgage from a lender.
Question: Why would a home buyer choose to buy on a Contract for Deed rather than through a traditional mortgage?
Answer: Most often a Contract for Deed is a short term (3-5 year) loan. Home buyers that seek Contract for Deed financing could have damaged credit and need time to restore their credit or they might be self-employed and struggling to adequately qualify for a mortgage. Since a Contract for Deed is essentially a short term loan, this gives the buyer the time to restore his/her credit rating or establish a credit score to qualify for a traditional loan through a mortgage company.
Question: Will the seller report my on time payments to the credit bureau to help me restore my credit?
Answer: It's possible for sellers to report on time payments to the credit bureau, but that must be an agreement between the buyer and seller. Most sellers do not report payments to the credit bureau.
Question: Other than the 3-5 year term of the Contract for Deed, what other terms of the contract should a buyer prepare for?
Answer: Typically the interest rate on a Contract for Deed is higher than because the seller is taking on more risk with the buyer. However, the maximum interest rate that a seller may charge is capped by Minnesota state law. Also, the lender on a Contract for Deed will often want a sizeable down payment often between 10% - 20% of the purchase price of the home.
Question: Is it true that the seller of the home maintains title to the property while being financed under a Contract for Deed?
Answer: Yes, unlike tradtional financing where the buyer holds the title to the property, in a Contract for Deed the seller hold the title until the property is either refinanced through a lending company or paid off in full.
Question: Must a Contract for Deed be recorded at the county?
Answer: For the protection of both the buyer and the seller, State law requires that all Contract for Deed agreements be recorded in the office of the county recorder in the county in which the property lies.
Question: Can a home buyer who is buying on a Contract for Deed ever lose the home he/she is buying?
Answer: Defaulting on a house payment can lead to the lose of the home. One thing that home buyers who are financing through a Contract for Deed should be very aware of is that the eviction timeline on a Contract for Deed is much shorter than that of a traditional mortgage. The eviction after non-payment is usually less than 60 days.
Question: Is it possible to buy a home that is not accepting Contract for Deed terms?
Answer: Yes, but an investor would most likely need to purchase the home first with the understanding that the investor would sell it to the buyer on a Contract for Deed.
Question: Is there information available for home buyers that are interested in purchasing a home on a Contract for Deed?
Answer: There is a lot of information available for anyone who might be interested in purchasing on a Contract for Deed. One resource that offers useful information is the Minnesota Home Ownership Center website at hocmn.org.