A contract for deed, also called a land contract, is an easy way to buy a house. You make a deal directly with the seller. You agree on a price and sign a contract to pay the seller a certain amount each month. There is no down payment and little paperwork. It's a good technique for young people who can't qualify for a regular mortgage, but at some point, you need to secure a refinance.
Why to Change
Many contracts specify that they must be replaced with a conventional home loan at a certain point, like when 40 percent of the purchase price has been paid. There are other reasons to refinance. A government-guaranteed mortgage usually will have a lower interest rate and better terms. A contract buyer also has to pay real estate taxes and insurance directly.
Follow FHA Rules
The Federal Housing Administration allows conversion of contracts for deed either as new mortgage financing, or as a refinancing. In either case, you apply to a lender such as a bank or credit union for a federal FHA loan, with standard provisions for credit history, monthly income and financial resources. You'll also have to provide the appraised value or total cost to acquire the property under the contract.
Pay Off the Contract with the Mortgage
An FHA-guaranteed refinance of a contract can't be used to take out any cash from equity in the property and all funds must be used to pay off the contract. You can, however, use your equity as a down payment or for closing costs on the new loan. This makes it a good way for young buyers to build up money for a mortgage.
Refinancing Gets You the Title
With a contract for deed, the seller retains title to the house until the entire contract amount is paid. Once it's refinanced, you'll have the title in your name. You also can incorporate real estate taxes, house insurance and similar costs into the mortgage payment through monthly escrow payments, so you don't have to deal with large annual bills.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.