What is a deed contract and how does it work?
Due to the recent economic crisis and tightening of home loan requirements and rules, it has become extremely difficult to get approved for a traditional home loan when buying a home. Many people have lost their jobs, been forced to move out of their homes, filed for bankruptcy, and defaulted on their loans. These events ruined their credit histories preventing them from buying a home using a traditional mortgage, leaving them with only a few options to rent until their credit improves or find a way to buy a home with some other type of creative financing. If you are one of those families, we suggest that you look into buying a home with a deed.
Deeds are designed to help people with poor or no credit become homeowners. Whether you’re looking to buy a single-family home, condo, townhome, or even a duplex, there are always ways to buy it, even if you don’t qualify for a traditional mortgage.
Many people think that CD transactions are dangerous, complex and scary, but in reality they are very simple, fast and easy. Due to their simplicity, it is often easy to get confused, especially if you are not very familiar with them. In this article, we’ll try to give you an overview to help you become familiar with CD transactions and help you make better real estate decisions.
What do you need for it? Well not much!
- At least 6-10% discount
- Source of income to be able to make monthly payments
- A good rental history but not required
Many people have a general idea of what a contract by deed is, but very few know all the ins and outs of it. These types of transactions seem to be very easy, fast and simple, but they can get very complicated if you deal with inexperienced professionals or directly with the owners.
So what is the contract by deed and how does it work?
A deed is an agreement between the seller and the buyer in which the seller finances the property. Instead of using the bank, the buyer makes an initial monthly interest and principal payment directly to the seller until the balloon payment is due (if applicable).
Most Minnesota deed contracts would have a 3-5 year balloon payment with interest rates ranging from 5% to 8%. Sellers generally ask for at least a 10% down payment. Some agree to as little as 5% and others want as much as 20% and more. The monthly payment is calculated like any other mortgage payment. The only difference is that you will pay a higher interest rate (5%-8% vs. less than 4% if you finance through the bank) and have a balloon payment due in 3-5 years.
What is a balloon payment?
A balloon payment is a final payment of the amount you owe the seller. It is the amount that must be paid to the seller at the end of the terms of 3 to 5 years to have full possession of the property. In most cases, buyers won’t have as much cash saved up, so they’ll have to refinance with the bank or some other private lender.
Try to stay away from going into businesses outside of the kitchen where you don’t have a formal closing and don’t have seasoned professionals guiding you. Avoid making expensive real estate decisions! It’s all too easy to take advantage of buyers who have no choice but to rent, so we suggest you consult with an attorney or use an experienced real estate agent to help you buy a home on deed in mn.
Using a real estate agent who knows about deeds will save you money in the long run and help you make the right decision. However, Realtor services for the buyer are completely free because they are compensated by the seller. So why not have someone who knows what he’s doing guide him through the process?
A couple of things to consider when buying into a deed contract:
- Is the house really worth what the seller is asking for it? Be sure not to enter the property underwater. Although, most deeded home contracts will be a bit expensive. Do an appraisal if necessary.
- Are there ties against the property? Make sure you are using a title company to close the deal
- Is the interest rate fair? Make sure the interest rate the seller is charging you makes sense and is not exaggerated.
- Are all taxes and fees paid by the seller?
- Be sure to do the inspection! Hire an FHA inspector, he will point out many things about the property.
- Work with a real estate agent, stay away from direct offers from the owner
So whether you have bad credit or not, don’t worry! There are still ways to buy a home in MN, you just have to find them!