How Contract For Deed Works in Minnesota
Contract for deed in Minnesota is sometimes referred to as a land contract or owner/seller financing, which allows the owner of real estate property to finance a buyer during a purchase transaction.
Since no banks are involved the advantage to the buyer is flexibility on loan qualifications such as income or bad/no credit. This is why contract for deed is the #1 alternative home financing option in MN for buyers who can not qualify for a bank mortgage.
Feel free to head over to our frequently asked questions page that also addresses many questions relating to how contract for deed works.
Does a Contract for Deed Transfer Ownership?
In a contract for deed ownership is transferred with the borrower taking equitable title to the property. The home buyer reaps the benefits of any increase in the house’s value; whether that be through rising home prices or a kitchen remodel that gets completed. This also allows the buyer in a contract for deed transaction to sell the home at anytime.
In return, the seller will retain legal title to the property until the loan and terms outlined in the contract for deed are satisfied; usually by means of an eventual refinance into a bank loan or sale.
Once this happens a buyer will be given a warranty deed to the real estate property that gives them full legal ownership.
That is why this type of real estate transaction is called contract-for-deed.
Typical Contract For Deed Terms
For typical contract for deed terms the most unique is the use of a balloon payment, which allows the contract for deed holder (seller) to dictate how long they are willing to finance the transaction. For our loan program this is typically set for 5 years, which allows enough time for the buyer to either refinance into a bank mortgage or sell the home.
It is also common for balloon payment dates to be extended assuming the buyer stays current with payments, but there can be no legal guarantees at the time of signing the contract for deed.
There are typically no escrows in a contract for deed with property taxes and homeowner insurance being paid separately by the buyer, thus they are not included with the monthly payment.
A typical down payment with contract for deed is 10-20%. Since credit is not usually part of the loan qualification process; a down payment becomes the main method sellers reduce their risk during the contract for deed transaction.
This is in stark contract with banks where excellent credit is what allows for the many low down payment options available to home buyers.
How are Contract for Deed Payments Calculated
Similar to a bank mortgage, or even a car loan, contract for deed financing is an Installment loan. This means there will be an interest rate with a repayment schedule over a specified period of time (ex. 30yr fixed rate).
This means every every month when a payment is made a portion is going towards principal and interest, which ultimately reduces the loan balance as time goes on. It is common for sellers to provide an amortization schedule to buyers, which shows exactly how much interest and principal is being paid every month on the loan.
Contract for deed payments are calculated based off the initial loan amount, which is the purchase price minus the down payment.
Ex: $200,000 sales price minus $20,000 down payment = $180,000 loan amount
As an example, we can then add a fixed interest rate of 6% over a 30yr term and using our monthly payment calculator can determine the monthly payment.
Monthly payment (principal & interest only) = $1,079.19
There should be no pre-payment penalty, which allows the borrower to make extra payments and/or refinance into a bank loan at any time during the contract for deed.
Still not sure how contract for deed payments are calculated? You can contact us anytime with a property you are interested in and we can run the numbers for you!
What is the Average Interest Rate on a Contract for Deed?
An average interest rate on a contract for deed is determined by something called the maximum usury rate for Minnesota, which is regulated by the MN department of commerce. There is also a phone number that can be called, but for the most updated rates it is best to use the MN Commerce Department’s website.
Since contract for deeds are rarely set for 10 yrs or less (except for very small loan amounts) the average interest rate being used will always be the lesser of the two possible interest rate options (or Note A on the commerce department website).
What does this mean for the buyer?
Simply put, the seller can not just charge any interest rate they want. Out of any mistakes we see on other contract for deeds the interest rate charged is the #1 mistake. It is the seller’s responsibility to know the current maximum usury rate for any given month, but many sellers who have never done a contract for deed before may not know or understand the state statutes.
This can be disastrous for the buyer if they are unaware of what the maximum usury rate is for any given month in Minnesota; potentially causing them to have a much higher monthly payment then needed.
It would not matter either if the seller used Interest only rates, which can still be possibly legal with contract for deed. However, the use of interest only rates is such a poor deal for the home buyer we would never recommend them.
Do You Have to Charge Interest on a Contract for Deed?
This question gets asked a lot from those where their religious beliefs prevent them from getting a mortgage through a bank. Since the seller is still legally the owner of real estate property in a contract for deed we have found this is an excellent choice for this niche group.
How Can I Obtain Contract for Deed Financing?
For those who can not obtain bank financing, and are seeking alternative loan options, a contract for deed can be an excellent choice. We provide this type of financing option to home buyers in the state of Minnesota.
To get started simply fill out the contact form below!
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No Credit Check
Bad or no credit is OK! This contract for deed financing program is strictly income & cash down payment based.
Fast & Easy Application
Get an immediate response on loan approval without all the hoops a bank makes you jump through.
Get The Home You Want
Don't let that perfect house slip by because the bank turned you down for financing. All of Minnesota qualifies. Realtors always welcomed.
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