If you are considering entering into a Contract for Deed, it is important to understand that it is not the same as a mortgage loan. Instead, a Contract for Deed is an agreement to buy a home from a seller, while the seller keeps title to the home. Typically, buyers make their payments directly to the seller for a certain number of years and then a balloon payment (or remaining balance) is due, although sometimes the seller is willing to hold the contract for a full term.
- Is it easier to buy a home with a Contract for Deed?
- What is included in the monthly payment?
- Who is responsible for repairs and maintenance?
- What happens if the Contract for Deed is canceled by the seller?
- Will I be required to make a down payment?
- Are there closing costs for a Contract for Deed?
- What if the balloon payment is due and I can not get approved for a mortgage loan?
- What is the Due-On-Sale Clause?
- What happens if the seller doesn’t pay their mortgage and the home goes into foreclosure?
- How do lenders view a Contract for Deed?
- Is there a difference between Contract for Deed and Rent to Own?
- What happens when I pay off the Contract for Deed?
Entering into a Contract for Deed involves many of the same steps as buying a home with a mortgage loan. One major difference is you do not have the same protection rights, since the seller retains ownership. We strongly recommend consulting a real estate attorney before signing a Contract for Deed.
The monthly payment includes principle and interest. The seller determines the interest rate and how much of your payment is used to pay the principle (or balance). Generally you pay the seller directly for property taxes and insurance. You may want to request proof from the seller that both the property taxes and insurance are paid. [To Top]
You are responsible for repairs and maintenance, including the cost. If you fail to maintain the home or make repairs the seller can cancel the contract. [To Top]
A Contract for Deed is generally canceled if you miss a payment or do not maintain the property. If the seller cancels the contract you have 60 days to resolve the reason. This includes paying fees to reinstate the contract. If the contract is not reinstated, you are required to leave the home. You also lose any money you have paid the seller. [To Top]
Sellers often require a down payment typically 10-20% of the sale price, but most of the time the amount can be negotiated. Any down payment paid to the seller should be applied to the principle. [To Top]
Yes, there are closing costs and they are very similar to a mortgage loan closing. We strongly recommend you have the closing done by a title company who can complete a title search and ensure the seller is the legal owner. A title company will also use the Contract for Deed Minnesota Uniform Conveyance from 30.1.1 that can be found at www.commerce.state.mn.us; and record the Contract for Deed with the County Recorder’s Office. State law requires all contracts to be recorded within four months. [To Top]
Most contracts are between two and ten years. It’s important to have enough time to become mortgage ready. If you are unable to pay, the seller will likely cancel the contract and take back the property. [To Top]
Most mortgage loans contain what is known as a Due-On-Sale-Clause. If the seller does not have approval from their current lender to sell the home with a Contract for Deed, the lender can call the loan due. If this happens, your balloon payment becomes due or the contract is canceled. The Due-On-Sale Clause only applies if the seller has an existing mortgage loan(s). [To Top]
If the home is foreclosed upon, you will likely lose the money you have paid and the right to live in the home. Mortgages and liens have priority over your Contract for Deed. Legally, you can take action against the seller, but it is at your own expense. We recommend requesting proof from the seller that they are paying their mortgage. [To Top]
If your contract is for more than 12 months, most lenders no longer consider you a first time home buyer. This means you can’t qualify for some mortgage and down payment programs. When you apply for a mortgage loan to pay the balloon payment, you will likely be required to pay additional closing costs and a down payment. If the property has depreciated and is no longer worth the amount you owe the seller, you could be required to pay a very large down payment. [To Top]
Yes, Rent to Own (or lease to own) means you rent with the option to buy in the future. You are the tenant and the seller is the landlord. The seller is responsible for repairs and maintenance and paying property taxes and insurance. You are usually required to make a large non-refundable down payment. [To Top]
You should have a title company update the title work to make sure the title is still clear, and to arrange for a final closing. Typically, the seller is responsible to provide a Warranty Deed, and pay the State Deed Tax, the buyer is responsible for recording all documents. [To Top]