What is a Contract for Deed Purchase?

Contract For Deed

I recently received an inquiry asking for help understanding  what is a Contract for Deed. Please understand that you should always consult an attorney for legal advice and their perspective on the mechanics of this process.

That being said, essentially a Contract for Deed, or Land Contract,  Contract Sale, etc is an arrangement whereby the seller holds title to the property until the buyer makes all the payments required by the contract/agreement. Should the buyer default during the prescribed time period, monies paid to the seller are essentially treated as rent and no equity is accrued by the buyer.

This type of arrangement can be used when a buyer has little or no down-payment funds and a seller has no need for the equity in the property being sold and can, in essence, finance the buyer’s purchase. Typically buyer and seller agree on a price for the property and terms of purchase. Usually a portion of the monthly payment made by the buyer to the seller is credited towards the purchase price of the property for a period of time. During the period of the contract, the Buyer makes installment payments on the purchase price and is entitled to possession and equitable title to the property. The Seller holds legal title and continues to be liable for payment of any underlying mortgage.

There are alternatives to this type of purchase vehicle including FHA loans and other type of arrangements. Contact me for additional information. The links below are for additional information on the subject.

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Standardized Good Faith Estimate & Updated Settlement Statement (HUD-1)

Effective today, January 1, 2010 several new procedures and forms go into effect, courtesy of Housing and Urban Development, that, in theory will allow home buyers who are obtaining mortgages to better understand and compare their options.  In theory, this will allow them to obtain better loan terms, lower interest rates, and lower closing costs. Copies of both forms are below.

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One of the big benefits is the standardized Good Faith Estimate. In the past, each lender used their own form/format to deliver pertinent information to the loan shopper. Obviously this could lead to making comparisons more difficult than necessary. Now each lender will be using the same forms and as result borrowers will be able to make value comparisons much more easily, and potentially, secure better terms.

Additionally, there are new requirements on lenders as to make sure that quoted amounts do not change between estimate and closing. In fact, some of the items cannot change without affecting the closing date. There are others that can change within certain percentages.  As a borrower this gives you some certainty that preciously may not have been there.

Listed below are additional resources for more information. As always, feel free to give me a call 630.542.7732 or email me to discuss this or any other topic further.

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Aurora Condo and Townhome market report

New this month – Market Report on Condos and Townhomes in Aurora. This will be following the same format as the monthly single family homes report but will focus on this segment of the market. Industry news in recent weeks has included the expansion and extension of the Home Buyer’s Tax Credit. Essentially, the program for first time buyers requires a contract date no later than April 30, 2010 and a close date no later than June 30, 2010. The amount is 10% or a maximum of $8,000. Income limits have been adjusted upward so more people may be eligible. Existing homeowners (not just upgraders) who have owned and lived in their home for five consecutive of the last eight years may be eligible for up to $6,500. This chart has a good summarization of the changes. And for a Frequently Asked Questions or FAQ, go here.

Data comparisons* are made for the current 12 week period vs the previous 12 weeks.

Homes Under Contract, 13 vs 10, or an increase of 30%. This upward trend has been steadily continuing over the last several months and continues into the fall months. Homes Sold remained steady – 11 vs 11. They have been at this level on a continuous basis since early June, 2009, indicating a relatively stable market.

Continuing a trend that  started in July, Homes For Sale decreased 9% from 610 to 558. This continued reduction in inventory bodes well for stabilization in pricing and competition in the marketplace.

Median Price for Homes Sold in October 09 is down less that 1% from $152,167 to $151,288 – an insignificant change. The median for Homes Under Contract however, dropped from $162,575 to $150,896 – a decrease of 7.2%. Median List Price dropped 2.5% from $162,262 to $158,171. All three pricing metrics have been gradually declining over the past 6 months.

Condos and Townhomes in Aurora, IL

These stats are also available on an individual zip code basis. Contact me to take a closer look at your particular area. Or request your own customized report and it will be emailed promptly.

Housing and Economic Recovery Act impacts Naperville home buyers

The Housing and Economic Recovery Act (HERA) regulations are effective July 30, 2009.

The Housing and Economic Recovery Act amends the Trust in Lending Act (TIL), implemented through Regulation Z. It has a number of provisions including the Mortgage Disclosure Improvement Act, which changes the Truth in Lending Act requirements surrounding the early final disclosures to homebuyers and addresses the timing of when fees can be charged. The purpose of these changes is to prevent deceptive practices in the home mortgage industry and to ensure that buyers get relevant information prior to closing. This is good for Naperville area home buyers although the changes may have an impact on closing dates.

In a nutshell, the key changes are listed below:

1. Upfront fees cannot be collected by the lender (exception being credit report fee), until disclosures are received.
2. Loans can be locked at the time of application if fees have not been collected.
3. Home buyers must be provided an appraisal 3 days prior to closing
4. The final Truth in Lending must be provided to the Borrower 3 days prior to closing
5. An increase of more than .125% in the Annual percentage rate (APR) from the initial Truth in Lending Disclosure requires  (TIL) disclosures to be revised.
6. which means lenders will have to get the closing instructions to the closing attorney much earlier.

The day of a rush deal, fast closing may be gone.  The new regulations and investor guidelines redefine “Rush” to a minimum of 7 days from the date initial disclosure are issued. That is 7 days from application, 3 business days for mailing notice.

Update to Tax credit as downpayment approved by HUD for Naperville home buyers

Update 06/02/09:

The following paragraph is excerpted from an Illinois Association of Realtors bulletin published June 2, 2009. It addresses what is being done in light of the lack public funded programs in Illinois. FHA approved lenders may come off the sidelines in the near future but for now, they are still examining and evaluating the program.

FHA’s rules allow state housing finance agencies and certain nonprofits to ‘monetize’ the tax credit (depending on the amount of the mortgage). While a short-term bridge loan to monetize the tax credit is not a product immediately available from FHA lenders in Illinois, the IAR is currently working with the Illinois Housing Development Authority to determine the feasibility of developing such a program that can be used in conjunction with an FHA mortgage loan. The tax credit applies to qualifying home purchases made by first-time homebuyers on or after Jan. 1, 2009 and before Dec. 1, 2009. For more details on the tax credit see www.realtor.org. Read theMortgagee Letter 2009-15 regarding the monetization program released by HUD last week.

Naperville home buyers – Tax credit as downpayment approved by HUD

Ok folks, the word is out again. HUD Secretary, Shaun Donovan, announced that homebuyer’s will be allowed to apply the $8,000 tax credit towards the purchase cost of a FHA-insured home. The concept was first announced several weeks ago at the NAR mid year convention in DC but was quickly retracted while additional details were worked out.

There are conditions and details that need to be more clearly understood and the question of whether or not mortgage lenders will go along with the program remains to be seen. As of now, here are some of the condtions that apply:

• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
• The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.
• Secondary financing may be “soft” (silent) or require a monthly repayment.
• If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.
• Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
• If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.
• The secondary financing may not require a balloon payment before ten years.

This is huge for qualified first time homebuyers. And it has the potential to be a great stimulus for the housing industry and economy. If you would like to discuss or explore this in greater detail, talk to you local real estate or mortgage professional or give me a call.

Update: OMB has asked FHA to hold off on tax credit bridge loan program

Tuesday evening I blogged about the FHA program that would have allowed first time home buyers to use the expected tax credit as a down payment. Apparently, at the request of OMB, FHA has withdrawn Mortgagee Letter 09-15. Hopefully this action is only temporary.

The text of the withdrawn letter can be viewed here. As more info becomes available I will keep this updated. 

(Thanks to my friends at Virginia Association of Realtors for being a great source of information.)

Tax Credit Used for Down Payment

As reported in Daily Real Estate News 5/12/09

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, on Tuesday said that the Federal Housing Administration is going to permit its lenders to allow home buyers to use the $8,000 tax credit as a down payment.
Previously, most buyers wouldn’t receive the funds until after they filed their tax return, and that deterred some people from using the credit. The NATIONAL ASSOCIATION OF REALTORS® has been calling for the change.

“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan says. His remarks came in an address to several thousand REALTORS® gathered Tuesday morning at “The Real Estate Summit: Advancing the U.S. Economy,” at the 2009 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington, D.C..

He says FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.

Want more details? Give me a call or email me and we can discuss how you can take advantage of this now!

FHA is not a bad (nor obscure) word!

Last month I had a couple of posts that talked about the effects & opportunities that the Economic Stimulus package presented to the real estate marketplace. I saw bits of press and some Realtor and NAR advertising about the $8000 first time home buyer credit. There were lots of blog posts about its benefits. But is it really understood? Are people really aware of how powerful the benefit is when combined with available FHA mortgage programs?

What brought this back to the front of my mind (no wasteland jokes, please) was a visit to my accountant. We were catching up on family news and she mentioned her daughter – a recent college grad – who had just leased an apartment in Chicago. I asked if they had looked at buying, especially with the new credit. Her answer that it would take a while to save the 20% down payment necessary in today’s market was surprising to me. I asked her if she was aware that with an FHA loan she could put down 3.5%, get a great rate and qualify for the $8000 tax credit. Her answer, obviously was no. (ok, should I have been quicker to get this scenario in front of my clients? Yes.)

So, presented here, is a purchase scenario for a first time buyer in the Chicago area market. Note that differences in property taxes will affect the potential tax savings. As always, check with your personal tax adviser for details and implications for you.  

This scenario estimates the potential tax savings to a first time home buyer purchasing a home under an FHA program that calls for 3.5% down payment. Assuming the buyer(s) eligibility for the new 1st time buyers credit of $8000 and deductible mortgage interest and property taxes, the first year tax savings could be significant. The 2 views below look at a full year tax savings (12 months) or optionally a mid year close which would yield a reduced, but still significant itemized deduction.

*These projections/estimates are not intended to replace the advice of a tax professional. Each case is different and should be reviewed by the appropriate professional. As always, I am available to discuss your plans. Please contact me at your convenience.

This combination of FHA financing and first time buyers credit is only available (as of this writing) until December 1, 2009. Is there someone in your family who could take advantage of this? Pass this on and let them see what the savings could be.  And oh, by the way, any unused portion of the credit is refunded to you by the government at tax time.)