In a contract for deed, the purchase of property is financed by the Owner rather than a third-party lender such as a commercial bank or credit union-Mortgage company. The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan.

Facts and features
A contract for deed is when the seller finances the sale of his or her own property. In a contract for deed sale, the buyer agrees to pay the purchase price of the property in monthly installments. The buyer immediately takes possession of the property, often paying 10 to 20% down of the sale price of the property, while the seller retains the legal title to the property until the contract is fulfilled. The buyer has the right of occupancy and, in states like Minnesota, the right to claim a homestead property tax exemption.

The buyer finances the purchase with assistance from the seller, who retains a security in the property.

The contract for deed is a much faster and less costly transaction to execute than a traditional, purchase-money mortgage. In a typical contract for deed, there are no origination fees, formal applications, or high closing and settlement costs.

Another important feature of a contract for deed is that seizure of the property in the event of a default is generally faster and less expensive than seizure in the case of a traditional mortgage.

If the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the property, and keep previous installments paid by the buyer as liquidated damages.

Because the buyer in a contract for deed does not have the same safeguards as those afforded a mortgagor in a purchase-money mortgage, the contract for deed may appear to be essentially a rent-to-own arrangement.

However, in a typical contract for deed, the buyer becomes responsible for the obligations of a mortgagor in possession, such as maintaining the property and paying property taxes and casualty insurance.

In the contract, either party may sell his or her interest in the contract.

Homebuyers may be attracted to a contract for deed purchase for several reasons. This method may be especially appealing to homebuyers who do not qualify for a mortgage, such as people who work cash jobs and are therefore unable to prove their ability to make payments.

Since the contract for deed process is significantly shorter than the mortgage-approval process, it may attract buyers who face time constraints or have limited options, such as people who are losing their homes to foreclosure.

First-time homebuyers who lack experience in the market or individuals who are wary of traditional financial organizations may also choose a contract for deed because of the relative simplicity of the buying process.

Buyers with credit issues-Tax issues-divorced-Self employed-Child support-Relocating-debt to income ratios-second home-vacation property are some of the main reason’s buyers will want to purchase a property on a contract for deed.

Steve Vennemann
BoardWalk Premier Realty INC
Owner financing specialist

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