Refinancing a Contract for a Deed
For potential home buyers who cannot qualify for a mortgage by obtaining conventional financing through a bank or finance company, purchasing a home may still be possible through a contract for deed, or land contract. If you have purchased a home or property through a land contract, and are now in a position to obtain a conventional mortgage, you may be able to refinance your land contract.
Other People Are Reading
-
Land Contract Basics
-
A land contract operates on the same principle as a mortgage; however, instead of a bank or finance company providing the financing, the seller finances the purchase. In most cases, the buyer and seller will agree on a purchase price, interest rate and payment schedule just as in a mortgage. The agreement will be reduced to writing in the form of a land contract agreement. The buyer will then make the monthly payments to the seller, instead of a bank or finance company, until the full purchase price has been paid. Once the agreement has been executed, the buyer obtains legal possession of the property but the seller retains the deed until the loan has been paid in full.
Preparing to Refinance
-
A lender will approach a refinance of a land contract in basically the same way they process an original mortgage or refinance of an existing mortgage. Your credit score will be important. Under federal law, you are entitled to one free credit report each year through annualcreditreport.com. You should check your credit score prior to applying. In addition, you will need income information for at least the last two years. Receipts showing that you have made your payments on time under the terms of the land contract will also help. Ask your seller for a current payoff amount as well before you apply for a loan.
-
Refinance Process
-
You may wish to compare rates and fees among several lenders before you officially apply. The application process may be slightly different from one lender to the next; however, the basic procedure is usually similar. Your personal information will be gathered, including tax returns and proof of income. A credit report will be requested. The property will need to be appraised to determine the value. Lenders will vary widely with regard to what criteria they are looking for in order to accept an application. If accepted, however, you will need to attend an official closing on the property where your previous balance owed to the seller will be paid by the lender and the deed will be transferred to you, subject to the mortgage amount.
Considerations
-
While land contracts can be an excellent alternative to a traditional mortgage, they can present problems for a buyer if the buyer is not careful. Be certain that the purchase price you agree upon in the beginning is not inflated. If the purchase price is more than the value of the home, you may owe more than it is worth when it comes time to refinance which will prevent you from being approved. Read your contract carefully as well to be certain there is not a penalty for early termination which may raise the cost of refinancing. Additionally, you may wish to require the seller to provide you with regular tax statements and mortgage balances showing that he is paying his mortgage, if applicable, to make sure the property is not encumbered by liens that will prevent you from obtaining traditional financing when you are ready.
-
