A contract for deed, also known as a land contract, allows those unable to qualify for traditional property loans to move forward with a purchase. In a contract deed, the seller remains responsible for the mortgage payments and collects a predetermined monthly amount from the buyer for the purchase of the home. Down payments on contract for deed property are typically smaller than on traditional loans.
Contract for Deed Method
Houses, land and buildings can be purchases on contract for deed agreements, regardless whether the seller has a mortgage or owns the property outright. A purchase price is agreed on, a payment plan set up and a down payment received. Once the payments have been made in full, or the buyer is able to gain traditional financing, the title transfers to the buyer. Because no professional lending institution is involved in a contract for deed arrangement, there are several possibilities when it comes to establishing a down payment amount on the property.
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Sellers may require a lump sum down payment in the contract for deed arrangement. Most contract for deed agreements are recorded in the county's property deed office, which helps create a paper trail for the agreement. Before the seller relinquishes control of the property by placing a legal document of the arrangement in a government office, he may request a cash down payment. While traditional lenders restrict a buyer's ability to borrow a down payment, there are no such restrictions in a contract for deed sale.
Another approach to purchasing a contract for deed-based property is to offer a down payment to be paid in increments over time. For example, you make a $200,000 offer on a home with 20 percent down, but the 20 percent down will be paid at $10,000 a year for the 4 years of the contract. Offering such a large down payment may encourage the seller to not only agree to a land contract sale, but also to accept payments for the down payment as well. It is important that the buyer not promise more than he can pay over the time requested for the down payment, as many contracts for deed agreements allow the seller to keep all received money and foreclose on the buyer if the buyer is late on a single monthly payment.
Down payments on contract-for-deed properties are not usually as large as down payments for traditional financing. Traditional lending institutions have set percentages they require for down payments. Contract for deed sellers are not bound by such standards. In addition, many buyers approach a contract for deed sale because they do not have enough of a down payment to obtain traditional financing. Because they do not have the typical amount, they need the seller to accept a reduced down payment amount.