Contract for Deed FAQ

You can take sole ownership OR Business. Business ownership will have slightly different structures.

Investor will confirm income, assets & debts. Bank funds, 401k or retirement assets, proceeds from the sale of another property, proceeds from sale of other assets, and even gift funds (partially). Reasonable monthly debts compared to income (known as debt-to-income ratio) is needed to help ensure monthly contract for deed payments will not be uncomfortable for a homebuyers budget. Unlike the mortgage world, the investor for the contract for deed program can consider upcoming future income, part-time or seasonal income, non-purchasing spouse income, fixed income and asset-depletion perspectives. The investor also has creative ways to work with self-employed buyers who often write-off a lot of income for taxes purposes.

Lastly, ALL pages of lender pulled credit report (with score) is required OR after application and other documents have been approved, the investor will send a link to MySmartMove for you to pull your own report with score, background, etc. (application fee is around $40)

Personal Income: W2's or 1099. Last 4 paystubs. Rent roll. (if you have rental properties) Other income if applicable ~ Social Security, pension, separate maintenance, etc. Assets/Down payment/Reserves: Last 2 statements from bank, retirement and brokerage/‘Net sheet’ from sale of home/If gift, need source & amount.

Business Income: Need Articles of Organization and EIN of MN, LLC. (sole owner) Income: IRS returns ~ business and personal **If business income not on tax return, ALL business bank statement/Year to date P&L/Rent roll (if own rentals) Assets/Down payment/Reserves: Document source of down payment for last 2 months answer to this item.

 
Copy of photo I.D such as driver’s license or passport
 

 Just like a traditional deal, the tranasction can be completed in as little as 21 days. Usually on average the process is 30 days. The first closing will be when the investor buys home selected. The second closing will be the same day back to you from the investor via Contract For Deed. 

Once the home of choice has been confirmed that it is under contract from the investor, instructions will be sent so that the down payment can be transferred to the title company. Funds are due within 2 business days of confirmation of final acceptance.  

Executive Title?First American handles title work for all transactions. 

1st Transaction Investor-Seller

2nd Transaction Investor-Contract For Deed Client. 

3rd Transaction Investor-Client when ready to satisfy contract.

When you first take title of home, AFTER THE 2nd closing, you will be provided a Contract For Deed title. Ownership from the sale is transferred with the buyer taking equitable title to the property. The home buyer reaps the benefits of any increases in the home’s value, whether that is through rising house prices or home improvements. The buyer also has the option to sell the home at any time.
 The seller will retain the legal title to the property until the loan and terms outlined in the contract for deed are satisfied; this often happens prior to the end of the contract via a refinance or sale. At this time the buyer will be given the warranty deed that provides them with full legal ownership of the property. 

 The buy back premium will vary based on the down payment. All numbers will be pre-determined & confirmed when it's time to make an offer.  

Interest rates vary, pending market conditions. Rates on average will be 1%-2% higher than the current rate. Rate will vary on the low or higher end based on the down payment. Please take note rates are regulated by Minnesota Statue  334.03

The goal is to be able to obtain a mortgage and buy out of the Contract For Deed within 3-5 years. 

If Contract For Deed is satisfied prior to the 5 year goal, payoff discounts will be earned and applied to the remaining balance of the Contract For Deed.

5 year balloon payment for buyers that take home in Business Title.    

You do have the option to pay off early or make “extra payment” there is no pre-payment penalty with this investors contract for deed financing. This means you can pay off the loan/refinance into a bank mortgage at any time. You can also make extra payments on the principal at any time. This assumes you are current on: monthly payments, homeowner insurance, property taxes/special assessments, HOA fees, etc. (any extra payments go towards delinquent amounts first). 

At time of the offer, the investor will ask sellers for 3% in seller paid closing costs. 

This will cover TWO transactions and THREE sets of costs: 

1st Transaction: Acquisition of the property from the current owner (bank, title, appraisal, etc.) 

2nd Transaction: Sale of the property to the contract for deed buyer (title and recording costs) 

3rd Cost: Upon payoff, there are liquidation costs (deed tax and recording costs)  These costs are either paid by the first seller (transaction 1) or paid by the client/buyer at closing. (transaction 3)
 

The goal is for there to be zero out-of-pocket closing costs, due at purchase.   
 

The down payment and cost of private home inspection are the only expenses a buyer can expect to pay.   
 

Home owners insurance, HOA fees, and having to pay property taxes in addition Contract For Deed payment should be noted.  Not specifically closing cost related. 

Compared to bank financing this can save a buyer thousands of dollars in closing fees that have to be paid upfront at the closing table.
 

Any acquisition costs when trying to purchase the property the investor will attempt to have the seller pay. The goal of the investor is to do there best to negotiate "closing costs" without affecting the purchase price, but there is a possibility outstanding acquisition costs will get wrapped into the contract for deed loan amount effecting price marginally. 

This transaction is very similar to a traditional purchase. When a home is selected you will decide if you wish to inspect the home. This is highly encouraged and recommended, this cost is paid by client that selects home of choice. Inspections vary by company, usually starting @ $400. 

Recent Foreclosure or Bankruptcy are NOT significant factors with a contract for deed! You CAN purchase a new home on a contract for deed with a recent foreclosure – even when IN foreclosure – provided you have at least 10% (or $30,000, whichever is higher) for down payment.   
 Chapter 7 Bankruptcy - Yes. You can purchase a home using contract for deed financing after your discharge date.
 Chapter 13 Bankruptcy? - Yes. You will most likely need permission from the bankruptcy judge to make a purchase, and unlike banks our contract for deed financing program is not based off your credit. This will make it easier obtaining financing. 

Inspection: Highly recommended, not necessary. On average $350-$500

Realtor Admin Fee: After successful completion of 2nd transaction (Investor to Buyer) there will be a brokerage fee due.  $495 REMAX Professionals.

 If your divorce has not been finalized then the answer is probably no. In Minnesota your partner/spouse will still have an ownership interest in the property; even if he/she does not sign any purchase documents (you try to buy it yourself). You should seek legal advice with an attorney to see if they have any creative solutions to get around this. 

 This is not a requirement typically with a contract for deed as it is more of a common rule from banks. It usually is a good idea for the borrower to obtain their own private appraisal on the property. It can cost up to $450 on average, but is well worth it to the buyer.
However, the investor will be purchasing the home from seller in order to close on a contract for deed with you and they will be obtaining an appraisal. This is an added benefit to you as the borrower for using their financing institutions.   

 The borrower/contract for deed client pays property taxes & homeowner insurance separately from the monthly payment when they become due. 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).
 What this means is your monthly payment 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 (May 15th & October 15th). As for homeowner insurance you will get this through your preferred company 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. The institutional investor will be added to the policy in case a claim is made to ensure the property is fixed (example hail damage to roof). A very standard practice for loans on a property to ensure repairs are made & sufficiently insured.
 Lastly, keep in mind that insurance and property taxes need to be kept current just like your monthly payment. Getting delinquent with either of this constitutes a default in a contract for deed.   

 Executive Title/American Title company shall record the contract for deed with the county on your behalf. You will get a recorded copy that can be used to homestead the property, which is usually 3-7 business days from closing. 

The closing shall be at an Executive Title/American Title location, TBD based on location of the home. 

You will not be required to attend closing, most documents will be electronically singed/confirmed.  

Even though documents will pre-signed,  however it will be highly recommend a final walk thru is performed and gets completed typically the day of or day before closing. It's important to make sure nothing has changed with the home since the inspection period (weather/damages from sellers moving out, etc.); as well as the seller has sufficiently cleaned the house and removed all trash/personal property. 

Sellers will be instructed to leave all keys/garage door openers at the home, so once the closing is completed you can move in! 

 Yes, this is actually one of the biggest benefits versus rent to own as an example where you are still in a tenant/landlord relationship.  

 Yes - As the owner you may sell the property at ANY time during the contract for deed. In fact, it is highly recommended borrowers do this as a last resort if they are unable to obtain bank financing by the balloon payment date. At the very least you do not need to lose your down payment along with principal paid towards the loan balance. 

Since no “Due On Sale Clause” you can avoid any default if unable to satisfy loan deadlines. The lenders/investors know that they are selling the property to you on a contract for deed, so this clause/terms is removed from the loan product.   

The investor does not report payments to the credit bureaus, which is common with contract for deed unlike bank financing.

 
However, when you go to refinance the home with a bank mortgage, the lender will contact the investor to verify payments made during the loan. The investor will need to confirm if you had any missed payments, current payoff information (the remaining balance left), etc. so this is still beneficial for refinance purposes. 

There will be language included in the contract for deed allowing the borrower through written request to have statements provided showing all mortgages/liens being paid on time. Any questions or concerns, please contact us.

 
If the seller/investor were to stop making payments the buyer may pay the mortgage instead, and deduct these payments from their monthly contract for deed payment.   

Strict lending standards are used for Investor/Commercial Business financing. If even 1 payment gets missed/failed to be submitted on any of the investors contract for deed homes it would be impossible to gain business from any bank or lender. 

Therefore, borrowers can have peace of mind knowing that the investors mortgage lenders are constantly ensuring they are conducting business with the highest professional standards.
 

Also,  the Department of Commerce is very proactive regulating all practices of real estate. Additional questions, please contact us.   
 

No. Contract for deed investors/sellers who try to do this open themselves up legally for predatory lending and is not something you need to worry about.
 

However; borrowers should be mindful that contract for deed has very different rules than bank financing when it comes to defaulting on the loan. If the borrower misses two payments the seller does have the ability to cancel the contract with written notice. 

There is then an additional 60 day period after the borrower is served a notice to get current with payments.   

Timeline with this example will help determine what a default means in contract for deed. Keep in mind house payments are paid in arrears (ex: October 1st payment is for the month of September).   

 1) A borrower misses their due date. A standard contract for deed form used in Minnesota states the borrower has a 15 day grace period from their due date to make the monthly payment without penalty. 

 2) After the 15 day grace period the borrower will be charged a 4% late fee on the total payment, which will be added to what is past-due. 

 3) If on the 2nd month’s due date the buyer fails to make a payment again they are now considered to be in default (60 days late). At this time the seller could choose to proceed with canceling the contract with written notice in order to take the house back.   

 4) There is a 60 day reinstatement period beginning the day borrower was served the cancellation notice allowing time to get caught up on payments. There will be additional legal fees involved the borrower must pay on top of their late payments in order to get caught up. 

 5) If the borrower fails to get caught up by the end of 60 days they will lose their down payment and principal payments on the loan, and the seller will take the home back.   

In total from the first missed payment 4 to 5 months will have passed before the home is forfeited at the earliest. Borrowers should therefore feel confident in their ability to make the monthly payments then before entering into any contract for deed.   

Keep in mind you can always sell the home to recoup your down payment and principal paid on the loan. If you begin to miss payments, or know you might be late on payments, please reach out and contact us.   
 

A Contract for Deed, also known as a land contract or installment sale agreement, is a real estate transaction in which the seller/investor provides financing to the buyer. While it can be a viable option for some buyers and sellers, there are potential disadvantages to consider:

1. Lack of Ownership until Full Payment: With a Contract for Deed, the buyer doesn't typically receive the deed and full ownership of the property until the contract is fully paid. This means that the buyer may not have the same legal rights and protections as someone who has complete ownership.
2. Risk of Default: If the buyer fails to make payments as agreed upon in the contract, the seller may have to go through a legal process to reclaim the property. This can be time-consuming and costly for the seller.
3. Dependence on Seller's Financing: Buyers relying on seller financing may face higher interest rates than those available in the broader mortgage market. This can result in increased overall costs for the buyer.
4. Property Condition Issues: The buyer may be responsible for repairs and maintenance during the contract period. If the property requires significant repairs, this can be a financial burden for the buyer.
5. Market Fluctuations: The value of the property may change during the contract period. If property values decline, the buyer could find themselves in a situation where they owe more on the property than it is worth.
6. Forfeiture Risk: Some contracts for deed include forfeiture clauses, allowing the seller to retain all payments made by the buyer and reclaim the property in the event of a default. This can be a harsh consequence for the buyer, particularly if they have made substantial payments.
7. Legal Complexity: Contracts for deed can be legally complex, and the terms of the contract can vary. It's essential for both parties to fully understand and agree upon the terms, and it's advisable to seek legal advice before entering into such an agreement.
8. Lack of Flexibility: Traditional mortgage agreements often provide more flexibility for buyers who encounter financial difficulties. Some contracts for deed may be less forgiving and offer fewer options for renegotiation during challenging times.

It's crucial for both buyers and sellers to carefully review and consider the terms of a Contract for Deed and, if necessary, seek legal advice to ensure that the agreement is fair and in their best interests.