Now that were moving out of one of the worst periods in real estate in my opinion, were stuck in between the people who of lost her homes to foreclosure and short sales, and their ability to purchase a new home. This is one of the reasons why rent has skyrocketed in the Minneapolis-St. Paul metro area among other communities around the country.
If you are a potential home buyer that has a good job as well as cash reserves but don't have credit, then a contract for deed may be an option for you. However there are several things you need to understand about the process so that you don't put yourself into an even bigger hole. There is a lot of misunderstanding when it comes to contract for deed, so I'd like to give you a few pointers.
I will start by explaining exactly what a contract for deed is. The purchase agreement is exactly the same as if you were to use traditional financing be it conventional, FHA or DVA. The difference is the seller of the property is acting as the bank for a specific amount of time. That's something that gets negotiated out and can be as short as 12 to 18 months or as long as five years. The mistake that most people make is the assumption that there's no money down. That may have been the case 30 years ago. If you're watching those late-night real estate infomercials, change the channel! They're trying to sell you books and CDs, that's the only business they are in.
If you want to purchase a home with a contract for deed, most sellers are looking for a minimum of 20% down of the purchase price. Then you make payments to them for that specific amount of time. At the end of that time frame, the idea is that you prepared your credit to the point where you can get a traditional mortgage at better terms and pay off the contract for deed. At that point your monthly house payments just shift to the new bank.
The biggest problem aside from people having the down payment is that you only want to purchase a home from someone who owns it free and clear. Meaning they do not have a mortgage on the property. If they still have a mortgage on the property, it's very possible that their mortgage documents say that if you try to transfer this property we can accelerate the foreclosure process. Bottom line would be, you put down 20%, move in and start making payments. Then you come to find out for five months into this that the person you are purchasing the home from has decided to just pocket that money and not make their mortgage payment. Their bank forecloses on them and you lose everything.
This is just one of the many potential problems of purchasing a contract for deed. I'm not saying that it isn't a viable option for people, but you have to understand exactly what you're getting into before you do it. The best advice I can give you is higher real estate agent that truly understands how this works.