Many homeowners who decided against a traditional mortgage or who did not qualify for them have used contracts for deed or rent to own agreements. These two options can be valuable to purchasers because it can open property ownership that may not have been otherwise possible. It can also be a benefit to sellers in moving their property, especially in a tough housing market. However, these options also come with some disadvantages.
For many homeowners who took advantage of one of these options in the past, they desire to refinance those agreements through a lender instead of financing through the original owner. Basically, this means that the purchaser is not refinancing in it’s truest sense, but is instead moving into a more traditional mortgage on their home and using it to pay the seller the remainder of the owed amount.
A contract for deed is a written agreement or contract between the seller and buyer of a property. In it are included all conditions of the agreement including the purchase price, the interest rate, the payment schedule, and any other conditions involved in the purchase. The buyer is in essence the lending institution making the process faster and more flexible than a traditional mortgage. Similarly, a rent to own agreement is a lease agreement that includes an option to purchase the property within a specified timeframe. In either case, the agreement can be structured in many different ways. Some lean towards benefiting the buyer, others the seller.
There are many considerations that should be made and specified in the agreement before a purchaser signs. In some cases, it is beneficial for the buyer to remain in a contract for deed or rent to own agreement. However, often as purchasers regain the ability to enter a traditional mortgage, or decide they would benefit from one, refinancing into a mortgage can be advantageous. This is especially true if there is an upcoming balloon payment originally agreed upon in the contract.
When the purchasing party in one of these agreements decides to move into a traditional mortgage, there are certain aspects that must be addressed. First, the purchaser must be approved. The process for approval would be similar to any standard mortgage including credit checks and underwriting. If approved, they must be approved for an amount that would satisfy the remaining balance due on the property.
Along with a purchaser being approved, the property must also meet the lender’s criteria. If the property is deemed too risky for a lender, it may not be eligible for refinance. Examples of this would include properties that are grossly overpriced, that are in need of major repair, or that have an unclear ownership history. An appraisal will be done just as in a traditional mortgage to ensure it qualifies.
If you do decide to refinance, there are some things that it would be wise to do beforehand that will make the process much easier.
As with any large financial decision, a great deal of thought and research should be done to ensure that the best decision is made. Refinancing has a lot of benefits that make it a desirable option. In many cases, a contract for deed will be more expensive than a traditional mortgage over the life of the finance agreement. Moving to a mortgage can be a large savings to the buyer. Also, because the original owner will technically hold the title, it can be risky to remain in the agreement. Refinancing will ensure that as long as you maintain your responsibilities, you will reduce the risk of losing the property.
Navigating mortgage and loan rates is complicated! Why not let our team do the hard work for you? Equity Source Mortgage is a trusted mortgage broker in Minnesota. We believe that people deserve a home to call their own. At Equity Source Mortgage, our number one goal is to match you with the best loan for you. Contact us or call us at 763-657-2000 to begin exploring your home ownership journey – YOUR Dream Is Calling!