How a Minnesota Contract for deed Works

Benefits of a Contract for deed Minnesota-

WHAT IS A CONTRACT FOR DEED?

Down payment.

Some sellers require 10 to 20% down of the sale price of the house to do a Contract for deed.

Homesteading.

Purchasing a home by contract for deed gives the buyer the right to homestead and take advantage of certain Property tax benefits such as the market value exclusion and being eligible to apply for the property tax refund.

Mortgage interest deduction.

As the legal owner, the buyer can claim mortgage interest deductions and real estate tax on their personal income taxes. Since contracts for deed typically do not require the seller to provide a year-end statement of interest paid, buyers should keep careful records of their payments.

Less stringent financing standards. Since it is the seller’s decision, they typically have less stringent underwriting standards than a mortgage loan. Typically a job or proof of income.

Lower transaction costs. There are no origination fees, points, formal loan applications or high closing costs with a contract for deed. Even if closed by a title company, which is recommended, the costs are much lower than for a mortgage.

Home ownership. Structured properly with terms that the buyer can afford, a Contract for deed may be a viable path to home ownership for those with credit challenges-Self Employed-Tax Liens-low credit scores-Relocation and much more.

Potential to improve credit score. Making timely payments on the contract can be a way to improve the buyer’s credit score. However, this will happen ONLY if the seller reports buyer payments to a credit bureau, which most private sellers do not. There are companies out there that will do this for a fee. It is a great idea if the buyer wants to build credit.

The Draw Backs of a MN contract for deed

  1. Lacks the protection offered under Minnesota foreclosure laws. If the buyer fails to make a payment or is in default on other conditions of the contract, the seller can cancel the contract and reclaim the property. This process usually takes 60 days but the buyer can catch up on the payments during the time.
  2. Financing with a balloon payment. If the buyer is unable to get a loan at the time the balloon payment is due, the seller has the right to cancel the contract with a 60-day notice, take possession of the property and keep any downpayment or other payments to date and any equity that may have accrued. I recommend talking to the seller a year in advance to see if they will extend the contract so the buyer has enough time to sell the house if need be.
  3. Seller retains title to the property. This means the seller can continue to get a mortgage on the property but it cannot exceed the contract for deed balance at the time. The best way to protect your self is to record the contract with the county recorder immediately after the contract is executed.
  4. Lack of consumer protections. This financing option does not provide the same protections available with standard financing products, leaving open the possibility that unscrupulous sellers will structure the contract with unfavorable terms. Use BoardWalk Premier Realty INC Steve Vennemann to help you draft the Contract for deed. We have been in business over 20 years and will negotiate the best terms possible for you.
  5. Repair and maintenance issues. The contract may state that the buyer is responsible for property repair and maintenance. Typically this is the case but on the good side its better than renting you can remodel or put sweat equity into the house.

Property taxes and Insurance. Unless otherwise stipulated in the contract, the buyer is responsible for paying property taxes and for obtaining adequate insurance.

  1. Have the property inspected by a professional inspector; make sure any purchase agreement for the contract for deed is contingent on a 3rd party professional property inspection.
  2. Purchase title insurance and consider having a title company conduct the closing: The title company will search for any outstanding mortgage or mechanics liens.
  3. We have lenders to pre approve the buyer if they don not qualify we can at least give them an outline of how to raise their credit scores so they can get a mortgage and refinance the contract for deed house they purchase.
  4. Consider working with an experienced REALTOR® who you trust as your “buyer’s agent”. They will look out for your interests and negotiate on your behalf.
  5. Record the signed and notarized contract for deed.
  6. Ensure the interest rate does not exceed the maximum allowed by law by calling the Department of Commerce at 651-297-7053 to get a recorded message for the current month’s maximum rate.Very important.
  7. Purchase homeowners insurance: Set up a monthly savings plan to ensure you have the funds for next year’s policy.

8. Create a monthly savings plan to pay for unforeseen repairs and homeowners insurance, as well as real estate taxes if not included in your payment.

Contract for deed financing gives buyers time to repair their credit, which allows them to qualify for a conventional-Fha-Va-MHFA-Rurak- mortgage later on.

BENEFITS OF SELLING A HOME CONTRACT FOR DEED.

  1. An expanded pool of buyers. When Real estate markets are slower or when credit is tight, sellers can expand the pool of potential buyers to those unable to get a mortgage loan by offering an interest rate and credit terms that conventional lenders are unwilling to offer.
  2. Provides a steady income stream (CASH FLOW). Sellers who own their property outright can use the contract payments to provide a steady income stream over a long period often at an interest rate higher than other investments.

Easy to cancel the contract. In the case of default by the buyer, the law allows the seller to cancel the contract without a foreclosure sale or judicial action, reclaim the property within 60 days, and retain any payments made by the buyer.

SELLING A HOME ON A CONTRACT FOR DEED SUE LIST

  1. Ensure that the contract for deed document is legal and conforms to Minnesota law.
  2. Use STEVE VENNEMANN REALTOR® /BROKER to assist with the purchase agreement and closing.
  3. Understand the buyer’s situation and refer him or her to the free housing counseling services available in Minnesota if needed. As the seller, you want the buyer to be successful. The best chance for success comes from a well-educated buyer. The Minnesota Home Ownership Center (www.hocmn.org) refers buyers to housing counselors for free in-depth counseling.
  4. Consider escrowing for taxes and insurance. If the buyer fails to pay taxes and insurance, your property will be at risk. A seller can escrow a portion of the payment to pay annual property taxes and insurance. If not a seller should be listed as an additional insured on the insurance certificate and register with the county the property is located in to request duplicate notice of delinquent real property taxes. Please check with the local county auditor-treasurer’s office for specific details about procedures and payment of the filing fee, as provided for under Minnesota Statutes, section 276.041.
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