Financing with Contract for Deed

(My Original Blog Post: http://timemyself.com/time/financial/invest/real-estate/contract-for-deed/financing-contract-deed/)
How does the Financing work with a Contract for Deed: When you first buy a contract for deed, no lender financing is needed at all. The seller is actually keeping the financing in their name like it already is.  It may be wise that the seller at least notify his/her lender that he/she will be doing a contract for deed transaction.  The seller would decide what kind of interest rate they will sell to the buyer at, which will determine the monthly payments once you add on hazard insurance and property taxes.  In addition the buyer will need a down payment at the time of the closing.  The seller will also decide if the loan will amortize like a standard loan does, or if it will be just an interest only loan meaning that no principle payoff or reduction of the balance carried over from month to month.  The more money you put down, the more say as the buyer you typically have in these kind of transactions.  The real bank financing comes in to play at the end of the balloon term which is typically 2-3 years, but can be up to 5-7 years in some cases.  As far as qualifying credit, I would suggest you have at least in the 500's for a credit score, and put together a game plan on hiring a service to help you increase that score to 600-620+ credit score over the next 1-2 years, and work hard at doing this as a buyer.  In the future it will be very important to your future refinancing if you have had any recent foreclosures, short sales, or bankruptcies on your credit report, as this can certainly extend the necessary time needed for the balloon and full loan payoff to get financing on this contract for deed, so that you can cash out the seller later.

What is a Balloon in regards to a Contract for Deed: A balloon payment simply means the final payment that's due to pay off the entire loan for the seller.  For example you buy a house on a contract for deed today for $200,000. You put 10% down ($20,000). You now owe $180,000 to the seller.  If the seller takes your payments every month for 3 years, and your terms state a 3 year balloon, and you are paying interest only payments, then let's figure out your balloon payment from there.  If after 3 years you are current on all property taxes, assessments and other fees, the remaining $180,000 would be the one last lump sum balloon payment needed to pay off the seller's existing loan which in turn gets you clear title and the deed to the property.  By paying this final lump sum off, the main difference you will see if that you will officially own the property with all rights now. More importantly now that you own the deed to the property, you can now officially sell the property yourself whereas before as a contract for deed buyer/owner you really only could rent out the property, or sell on a contract for deed, but now as the deed owner you can fully sell the house as the new owner of the property holding the deed.

A seller who no longer wants to hold a contract for deed: Many times a seller will sell to you, the buyer, on a contract for deed, but after they sell to you, they no longer want to have the financing in their name.  They want to be done with the property.  Let's say that the balloon term is for 3-5 years and the seller just doesn't want to wait that long until they get their money out.  In most cases the buyer's credit isn't good enough yet and they want 2-3 more years to get financing in place.  The seller can assign or sell off that contract for deed paperwork just like banks do with mortgages, it's very similar to that.  The new owner of the paperwork would honor the contract for deed terms with the buyer previously in effect, but it would simply just be a new owner you the buyer, make your payments to.  For the seller to sell this contract for deed after the closing with the buyer, 1 day later, 1 month later, or 2 years later, they have to make all of the paperwork and transaction look as solid as possible and to be a good asset for the next lender to buy from them.  What makes this a good asset to them is a large down payment from the buyer, the better the credit score, the more advantageous to the seller.  In addition, the longer the payment history on the contract for deed by the buyer helps a great deal when the seller goes to sell the contract for deed.  The interest rate, term and the balloon term of the contract for deed also play a big role in what the seller will eventually sell the contract for deed for.  Keep in mind as the buyer you still own the property and you get to buy the property at that price as the contract states,  simply what's changed is where you send the money to, so it's very similar to what you see out in the lending world.  The reason I explain this to you as the buyer is that you'll find a seller much more willing to sell a house to you on a contract for deed, if you make the transaction as strong of an asset as possible and help the seller out, so that he/she can sell it in the future.