Contract for Deed (CD) – Preparing for a Real Mortgage

I’m going to explore with you some ideas on how to structure a contract for deed when buying a home so that when it comes times to ditch the CFD and refinance into a regular mortgage you can choose your path.  First thing you should consider is an attorney to assist in writing up the CFD.  For those of you that don’t believe “if there is a will — there is an attorney”, then try this for some tips on protecting yourself when writing up the CFD.

Most people that are buying using a CFD have either have damaged credit or are self-employed and can’t get traditional financing right now.

  • Folks with Damaged Credit – The good news is there are things that can be done to expedite the recovery time.  Check out how to start working on your credit today!  Most items can be addressed relatively quickly 3 to 6 months.  If you’ve had a BK or foreclosure you’ll have to wait around 2-3 yrs.
  • Self-employed – The problem here is that if you have a good tax accountant that has you show good deductions, many times the end result is due to showing little income – that little income makes it hard to qualify on getting a loan.  One solution is to get a family member to co-sign and then create an exit strategy with them to get them off the loan within 1-2 yrs while retaining the new loan and not having to refinance a third time – extra steps again, but at least you can be released from the every looming balloon payment of the CFD.

Here are the quick and simple steps to getting into position for that Real Mortgage.  Below are some ideas I found out by digging around with underwriters.  My intention was to get ideas on how to structure things upfront so that when it comes time to actually have the underwriter review the file that it would be logical and make sense for the approval.

  • If the goal is to get out of the CFD within the first year – ask the seller to allow for a principle reduction on the CFD if paid in full within X amount of time (I would recommend 3 yrs.).   Several underwriters commented that this would not be an inducement to buy as it was originally agreed upon and would be acceptable for the new loan approval.  Why this would be of interest is due to guidelines that limit how much the new loan can be taken out within the first year.  The value is limited to the new appraised value or the original purchase price – lesser of the two. Ultimately this can save out of pocket money for those traditional closing costs that are affiliated with a Real Mortgage, as the closing cost could then be financed into the new loan amount.
  • Keep the interest of both parties in play – one thing that you should bring attention to the seller would be that this only applies for the principle reduction if ALL payments are made on time – this creates the need to get those payments in on time, which sellers love to hear.
  • An example of this might be:   Assuming an original purchase price of $210,000 with $10,000 down payment.  CFD loan then at $200,000.  After year 1 a principle reduction of $4,000, after year 2 a principle reduction of $1,000 and year 3 of $1,000.   So after year 3 you would owe $194,000.

When making an offer on a home requesting to use a CFD for the financing, the bottom line is have a plan with an exit strategy.   Good luck and happy CFD writing!

Michael DietrichNMLS ID 334183 – 651.206.3377


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