Advantages to Buyer in Contract for Deed
Home buyers choose contract for deed financing when they can not obtain a mortgage from a bank. There are many advantages to the buyer in obtaining contract for deed financing, and the following are some examples:
#1 - Much Less Stringent Financing Standards
With contract for deed financing credit is not part of the qualification process; as income and cash down payment are the primary criteria used. For income common sense is practiced as there are no magic formulas like what the banks use to determine loan amounts.
There are many reasons with credit why a borrower would get turned down for bank financing, but the following are just some examples:
- Self Employed
- Foreign National/not a full U.S citizen yet
- Recent Foreclosure
- Recent Bankruptcy
- Collections, judgments, back child support, tax liens, etc.
- Bad credit, no credit, or "lack of credit"
- Debt-To-Income Ratios are too high
Home buyers facing any of these issues would still able to obtain contract for deed financing.
#2 - You Gain All Equity Appreciation When Home Values Rise
Maybe the most important advantage to borrowers with contract for deed financing is when home values rise you gain all of the equity appreciation. Many potential home buyers who are years away from being able to get a bank loan will miss out on rising home prices, and then eventually be forced to purchase a house at a much higher price then what they could buy it for today.
When home values are rising buyers risk getting priced out of the market as their ideal home gets more expensive, and eventually the monthly payment becomes too high for them to afford. In real estate we talk about this commonly as home affordability.
Contract for deed financing allows borrowers to purchase a home and lock in today's prices.
It is not just rising home prices however, because since you own the house any remodeling projects like a kitchen or bathroom can also increase the value. This makes contract for deed very advantageous for homeowners that don't mind building a little sweat equity into their home.
#3 - Stop Throwing Money Away on Rent
Contract for deed financing, just like bank financing, will have a set interest rate amortized over a certain number of years (30 years for example) where the borrower is making monthly principal and interest payments. Thus, every month you are paying down the loan amount versus renting where it is just being wasted.
Many potential home buyers will compare their monthly payment on a contract for deed with current rental rates, which in the current market tend to be very similar. Even if the contract for deed payment is slightly higher, borrowers tend to make the mistake of not factoring in all the benefits of home ownership compared to paying rent where only the landlord wins.
Another benefit? Many landlords raise rent prices every year whereas with contract for deed financing your interest rate is fixed. This means your monthly payment will not change at any time during the loan term.
Many borrowers also enjoy the fact that they don't have to move multiple times, as well as owning the home compared to dealing with property management companies whenever something needs to get fixed with the rental.
#4- Homesteading/Deduction of Property Taxes
Purchasing a home through contract for deed financing gives the buyer the right to homestead and take advantage of certain property tax benefits such as the market value exclusion and being eligible to apply for the property tax refund.
#5- Mortgage Interest Deduction
As the legal owner of your property you can claim mortgage interest deductions along with the real estate taxes on your personal income tax return. This is a major benefit of home ownership as it allows many people to realize a larger tax refund every year.
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. However, many times at the request of borrower the seller can provide this statement if needed.
#6 - A Bridge to Home Ownership
Contract for deed financing can act as a bridge for those who face challenges obtaining a bank loan to still achieve home ownership, and all the benefits that come with it, until credit or income challenges get solved for eventual bank financing. Contract for deed is not meant to be a long term solution for borrowers as banks will always have the most attractive interest rates and loan terms.
The data relating to real estate for sale on this site comes in part from the Broker Reciprocity program of the Regional Multiple Listing Service of Minnesota, Inc. Real Estate listings held by brokerage firms other than Bridge Realty are marked with the Broker Reciprocity logo or the Broker Reciprocity house icon and detailed information about them includes the names of the listing brokers. Bridge Realty is not a Multiple Listing Service MLS, nor does it offer MLS access. This website is a service of Bridge Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.
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Listing information last updated on September 26th, 2017 at 10:24am CDT.