Although lenders are still making loans, the requirements to get one have become more difficult than ever. Even though you may have a sizeable down payment, a good job and steady income, if life events have damaged your credit, a conventional loan may be out of reach for you when you decide to purchase.
If you are having a difficult time getting a conventional loan then an owner-financed property may be right for you. Be careful, though. Not everything is what it seems on its face and in the absence of a lender, real estate agent, or another advocate you need to use the same level of due diligence you would if using these professionals when making a home purchase.
What is a Contract for Deed Home?
Also known as a land contract, installment land contract, or bond for deed, in some areas, and essentially a property that is ‘seller financed.’ Not to be confused with a lease/purchase, a contract for deed gives you right to live in the property, improve it, rent it and enjoy the same benefits of full ownership. The downside to this is that you do not have ‘legal title’ so a home equity loan may be out of the question unless you live in a state that recognizes your equitable interest in the property.
When purchasing contract for deed homes, buyers have ‘equitable’ title instead of a deed to the property. This will give you the rights to treat the property as yours, but the purchase is more like that of an automobile than it is a true mortgage. The seller will hold the title until you have made all of the payments on the property.
Are There Benefits to Buy an Owner Financed Property?
A seller who offers owner financing to you is giving you the opportunity to buy a home and improve your credit rating at the same time if you make your payments in a timely manner. Sellers of contract for deed homes will likely get top dollar for their home because they are offering to finance. However, you will not require an appraisal, credit report, title insurance and the numerous fees that are tacked onto a loan and you will save on the numerous fees that are required by a lender, so from this point of view, it’s a win-win.
Going from agreement to close is much faster when purchasing contract for deed homes, too, for the same reasons. There are not as many hoops to jump through when the seller is financing the home. Sellers, who choose to finance the sale of their property, find this little fact as appealing as buyers do.
Will You Need a Real Estate Attorney When Buying a Seller Financed Home?
Yes, because there are differences when purchasing contract for deed homes over purchasing with a conventional loan and you need to make sure that your rights as a buyer are protected. If done wrong, it can further damage your credit and financial situation instead of helping it. Depending on where you live you will need a purchase contract, a land contract and a memorandum of the contract for deed will need to be filed and referenced in the filing. Other forms that you may need to file are a property transfer affidavit, which may need to be filed with the city or county of the properties tax office and some counties may require principle resident restriction to get and tax breaks offered in your area because the property is your principal residence.
For your protection as a buyer, a draft of the deed should be written up prior to the closing and held in escrow until the property is paid for or until you can secure long-term financing for the property. Most sellers using a contract for deed will want a short-term, five to seven-year loan. This is often accompanied by a balloon payment at the end of the term.
Whatever the terms in a contract for deed, you need to have a professional advocate who is looking after your interests. If a seller does not want an attorney involved in a contract for deed from either their side of the transaction or yours, then you need to question the authenticity of the deal and you may want to run away from the deal as fast as you can.
An attorney can also prepare a closing statement, listing debits and credits of the buyer and seller. An amortization table may also be included with the projected payments to be made by you, the buyer, to fulfill the contract and claim the deed to your home.
Although not a requirement, a title search to discover any encumbrances on the property can be performed and you can buy title insurance if you so choose. If the seller is legit, and really wants to sell, they may agree to pay half of this fee because, in essence, it will protect both your interest in the property, as well as that of the seller.
Is an Owner Financed Property Right for You?
Not easy to find, contract for deed homes may offer you a viable way to make a home purchase. Making sure you dot the i’s and cross the t’s can mean the difference between a bad experience and a good deal. The rules of a contract for deed or land contract vary from state to state so you need to a professional in your corner and proceed with caution when purchasing contract for deed homes.
2 Point Highlight
Although lenders are still making loans, the requirements to get one have become more difficult than ever.
If you are having a difficult time getting a conventional loan then an owner-financed property may be right for you.
