Due to recent economic crisis and tightening of mortgage lending requirements and rules, it became extremely difficult to get approved for a traditional home loan when buying a house. A lot of people lost their jobs, were forced to move out of their homes, file bankruptcies and default on their loans. These events ruined their credit histories preventing them from buying a home using a traditional mortgage leaving them with only few options of either renting until their credit improves or finding a way to buy a home with some other kind of creative financing. If you are one of such families, then we suggest to look into buying a home on a contract for deed.
Contract for deeds are designed to help people with poor or no credit history become home owners again. Whether you are looking to buy a single family home, condo, town home or even a duplex, there are always ways to buy it even if you are not qualified for a traditional mortgage.
A lot of people think that CD transactions are dangerous, complex and scary but in reality, they are very simple, fast and easy. Because of its simplicity, it is often easy to get confused especially if you are not very familiar with them. In this article, we will try to give you a general overview to help you get familiar with CD transactions and help you make better educated real estate decisions!
What do you need for it? Well, not a whole lot!
- At least 6-10% down
- Source of income to be able to make monthly payments
- Preferably a good rental history but not required
A lot of people have a general idea of what contract for 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 can get very complicated if you are dealing with in-experienced professionals or with owners directly.
So what is contract for deed and how does it work?
A contract for deed is an agreement between the seller and the buyer where the seller is carrying financing of the property. Instead of using the bank, buyer a down payment makes monthly interest and principal payments directly to the seller until balloon payment is due (if any).
Most of contract for deeds in Minnesota would have a 3-5 year balloon payment with interest rates ranging from 5% to 8%. Sellers usually are asking for at least 10% down. Some are OK with as low as 5% and others want as much as 20% and more. Montlhy payment gets calculated just like any other mortgage payment. The only difference is that you are going to pay a higher interest rate (5%-8% opposed to under 4% if financed through the bank) and you have a balloon payment due in 3-5 years.
What is a balloon payment?
Balloon payment is a final pay of amount that you owe the seller. It is the amount that you need to pay the seller at the end of the 3-5 year terms to have full possession of the property. In most cases, buyers won’t have that much cash saved up, so they have to either refinance with the bank or some other private party lender.
Try to stay away from entering into over the kitchen counter deals where you don’t have a formal closing and don’t have experienced professionals guiding you. Avoid making costly real estate decisions! It is way too easy to take advantage of buyers who don’t have any other option but renting, so we highly suggest you consult with an attorney or use an experienced Realtor to help you buy a home on contract for deed in mn!
Using a Realtor that knows about contract for deeds, will save you money in the long run and will help you make a right decision. Nevertheless, Realtor services for the buyer are completely free because they get compensated by the seller. So why not have someone who knows what they are doing walk you through the process?
Couple of things to consider when buying on a contract for deed:
- Is the house actually worth what seller is asking for it? Make sure you are not walking into the property under water. Although, most of contract for deed homes will be a little bit overpriced. Do an appraisal if needed.
- Are there liens against the property? Make sure you are using a title company to close on the deal
- Is interest rate fair? Make sure the interest rate that seller is charging you makes sense and is not over the top
- Are all the taxes and assessments paid by the seller?
- Make sure you do the inspection! Hire an FHA inspector, he will point out a lot of things about the property
- Work with a Realtor, stay away from directly by owner deals
So of you have bad or not credit – don’t worry! There are still ways to buy a home in MN, you just have to find them!