Frequently Asked Questions Contract for Deed
Below are some frequently asked questions by borrowers on my contract for deed financing program.
No there is not. The lenders I work with know that I am selling the property to you on a contract for deed, so this clause is removed from the loan product. My conventional loans are on the commercial side (not what buyers typically think of with residential FHA and/or conventional financing) since I run a business.
I will have a mortgage on the property (which at no time can exceed the contract balance), and there will be language included that allows the borrower through written request to have statements provided to them showing all mortgages/liens being paid on time.
Legally if the seller were to not make payments the buyer may pay the mortgage instead, and deduct these payments from the monthly contract for deed loan. As the seller I am not allowed to have my monthly payment exceed the payment on contract for deed, so borrowers do not have to worry about a mortgage payment they can not afford.
Borrowers should be mindful that the strictest lending standards are used for my business financing, which in general terms mean if I were to even miss 1 payment on any of my loans it would be impossible to gain business from any bank or lender. In many ways borrowers can have peace of mind knowing that my lenders are constantly ensuring that I am conducting my business with the up most professional standards.
Nonetheless, there are safeguards put in place for the borrower to protect themselves in this instance.
The borrower pays property taxes & homeowner insurance since you are the owner of home. With contract for deed financing there are no escrows that are typically used with traditional bank lending (the bank pays this on your behalf and it gets added to your total monthly payment). Instead, you will pay the property taxes & homeowner insurance directly when they come due. What this means is your monthly payment to me is only principal & interest (pi). Keep this in mind for budgeting purposes.
Every listing should state current property tax amounts. For payments it is twice a year, or many counties allow you to set up monthly payments to avoid the large lump sums.
As for insurance you will get this through your own person as there are discounts with combining home & auto together. Credit plays a factor in homeowner insurance premiums, so the only way to know the cost is to contact your insurance provider. However, I can tell you the range I see most often for Minnesota is $1200-$1500/year. I as the seller will be added to the policy in case a claim is made to ensure the property is fixed (example hail damage to roof). This is fairly standard practice for loans on a property to ensure the repairs are made.
No. There is a clause called Alternative Acceleration Remedy, which is rarely used in contract for deed but can make things very challenging on the borrower. I do not use this, and all my contract for deeds will follow the Minnesota legal state statutes that govern the cancellation process.
There are other sources online that state you can lose the house by missing just 1 payment, but what get's failed to mention is the actual process of canceling a contract. More importantly, this statement does not detail the borrower's options once a payment is missed, which makes it seem like they have no ability to get caught up on payments. This is just not true.
Borrowers should be mindful however that Contract for deed financing has very different rules versus bank mortgage financing when it comes to defaulting on the loan. With contract for deed if the borrower defaults seller has the ability to cancel the contract with 60 day written notice.
Let's go through the timeline then to determine what a default means in contract for deed:
- The standard contract for deed form used in Minnesota states that the borrower has a 15 day grace period from their due date to make the monthly payment without penalty.
- After the 15 day grace period the borrower will be charged a 4% late fee on the total payment, which will need to be paid by the following month's payment due date. No partial payments are allowed.
- If on the 2nd month the buyer fails to make the late payment and get caught up they are now considered to be in default. At this time the seller could choose to proceed with cancelling the contract with 60 day written notice.
- However, at any time during this period the borrower can get caught up on payments. There may be additional legal fees involved the borrower must pay on top of their late payments, but it is still possible to get caught up and continue on with the loan.
Using the above scenario it is also quite possible the borrower who misses 1 payment, and gets charged a late fee, does provide payment to seller while then proceeding to miss the following month's payment. Although not ideal, the borrower is technically caught up and now follows the same exact timeline with grace period and consequently the late payment fee.
In other words, from a practical standpoint the borrower would need to miss 2 consecutive payments in order to be considered in default by the seller, and even then they would have another 2 months to get caught up on payments.
This means the borrower has a 4 month timeline in contract for deed before the seller can legally take the house back.
Keep in mind during this time frame you are still owner of the property, and thus you have the ability to sell the home and retain your equity before the deadline. It never has to end with the seller taking the house back as long as you understand the contract, and take action early enough in the process.
Nonetheless, borrowers should take their financial capacity to repay the loan seriously when determining whether contract for deed financing is the right choice for them. It is OK to decide renting is the safer choice if there are ANY concerns of missing payments.
My title company shall record the contract for deed with the county on your behalf, and I shall pay the cost for this as the seller. You will get a recorded copy that can be used to homestead the property, which is usually 3 business days from closing.
The maximum interest rate (aka usury rate) that can be charged on a contract for deed is controlled by the Minnesota Department of Commerce. This is on a rolling 2 month period with the number to call 651-539-1711. This is of important note as borrowers sometimes have concerns on whether interest rates are regulated or not, but is the state and not me who control the maximum interest rate.
As always, it should be stated that contract for deed should only be used as a last resort. Contract for deed never makes sense for a borrower if they can get bank financing. Contract for deed is meant to be short term financing with the goal to refinance into a lower interest rate bank loan.
There are multiple reasons why interest rates are higher on a contract for deed versus bank financing:
- first and foremost, the cost of financing is exponentially higher in the private financing world versus a bank. Using a company like Wells Fargo for example who has the ability to borrower money at extremely low rates, and even if they only charge the borrower 4% on a mortgage they still are making a healthy profit. Individuals like me do not have access to this sort of capital, and thus since my financing costs are substantially higher so then are my borrowers.
- As an individual I take on much more risk with contract for deed versus a bank. A bank has literally millions of loans to borrowers, and they usually will just write off the bad ones. There is also commonly private mortgage insurance (PMI) on bank loans. The borrower has a separate monthly payment they make to the lender that is insurance in case they default on the loan. In other words, there is not really any material risk whatsoever on just 1 loan with a bank. I on the other hand am not just only lending my money on a contract for deed but also my credit. My risk is therefore substantially higher on every individual loan compared to the bank, and thus it should be expected that I am compensated for it.
- Banks charge lower interest rates because they are working with what they consider to be high quality credit borrowers. You & I may disagree with what a bank defines as a "credit worthy" individual, but nonetheless this is one of the reasons why banks have lower interest rates. Credit & credit scores play a large role in everything from getting a car loan, credit cards, or even when signing up for cable or insurance, where generally you will pay higher interest rates compared to others. With contract for deed financing then it should not be seen any differently.
Since credit does not matter in contract for deed the owner financing the property utilizes the down payment as the main way to reduce risk exposure. By having more "skin in the game" a borrower is less likely to default on the loan.
This is versus rent to own financing that is still 95% a lease agreement, so credit matters very much still as it is a landlord-tenant relationship.
No there is not. Down payment assistance programs through local governments such as city, county, and state are only able to be combined with bank financing. For example, FHA or Conventional loans.
I will always try to get the best deal as it is in both our best interests to get the property at the lowest price possible. This does not mean I low ball sellers as the goal ultimately is still to get the home by paying a fair price. Since I am purchasing the home on your behalf you will be consulted on all counters/negotiations with the seller of property to make final decisions.
If you ever have any concerns about the value of property I can make the offer contingent upon a satisfactory appraisal, and if does not meet our offer price we can back out and have the earnest money 100% refunded (assuming the seller does not agree to renegotiate the price to meet appraised value).
Once I get my offer accepted by the seller we will have an inspection period to ensure the home does not have any major hidden issues, and once again if we need to cancel the purchase due to a bad inspection no earnest money will be lost.
If you find the inspection period satisfactory we will then move forward towards closing. At this time your down payment will be due, and we will sign all of our purchase agreement documents to finalize the contract. I will walk you through every step of the way and will be available to answer any questions or concerns you may have.
The closing shall be up in the Alexandria, MN area so you do not need to attend closing. We will pre-sign the few closing documents I need from you, and that way you can focus on the final walk thru that gets completed typically the day we close. We want to make sure nothing has changed with the home since the inspection period (air conditioner goes out for example); as well as the seller has sufficiently cleaned the house and removed all trash. I will instruct the seller to have all keys/garage door openers at the home, so once the closing is completed you can move in!
As a individual I do not report payments to the credit bureaus, so the home will never show up on the credit report. However, when you go to refinance the home with a bank mortgage the lender will contact me to verify payments made during the loan. It will have me state if you had any missed payments, current payoff information (the remaining balance left), etc.
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Listing information last updated on September 26th, 2017 at 10:24am CDT.