Due On Sale Provisions
The first issue to be aware of are the laws pertaining to Due-on-sale provisions and their effects on a BFD contract. A Bond for Deed may trigger a Due on Sale Clause, meaning the mortgage lien holder can demand payment in full. The Due-on-sale clause from the Louisiana-Single Family-Fannie Mae/Freddie Mac Uniform Instrument is as follows:
Transfer of Property or a Beneficial Interest in Borrower. As used in this Section18, Interest in the Property means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interest transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.
If all or any part of the Property or any Interest in the Property is sold o transferred without Lenders prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.
The title company working with you on the transaction will determine if there are relevant Due on Sale clauses that would prevent a bond for deed contracts use for a particular property.
About Private Mortgage Insurance In Mandeville La
Private mortgage insurance in Mandeville, LA, is insurance coverage that homeowners need to have in place if they wish to put down less than 20% of the homes cost. Essentially, PMI gives mortgage lenders some protection if a house falls into foreclosure due to the homeowner not making their monthly mortgage payments.
Most banks are risk-averse and do not like to lose money. Knowing that they can only recover about 80% of a homes value at a foreclosure auction if the buyer defaults, they protect themselves by requiring buyers to pay for a private mortgage insurance policythe PMIto make up the other 20%.
You can request to cancel your PMI monthly payments if your accumulated principal repayment adds up to 20% of the total loan amount so that the remaining 80% covers the value of the home. Because the lender assumes a far lower risk at this point, they may stop monthly PMI premiums and let you focus on repaying only your principal amount.
What Is A Bond For Deed Contract
A Bond for Deed is defined as a contractual agreement to sell real property in which the purchase price is to be paid by the buyer to the seller in installments, and in which the seller agrees to deliver title to the buyer after payment of a stipulated sum. This process is very similar to what some other states call aconditional saleor land contract. Another way to explain the process is that the seller finances the purchase but ultimately transfers title after all payments have been made on it, holding the BFD contract as a lien against the property.
Seller: The legal entity releasing a legal claim to real property in exchange for consideration .
Escrow: An instrument and especially a deed or money or property held by a third party to be turned over to the grantee and become effective only upon the fulfillment of some condition.
Due-on-sale provisions: A type of the provision of a loan allowing the lender to demand full repayment of the loan if the property is sold.
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Income Tax Deduction For A Buyer
There are benefits to a buyer in a BFD transaction. The purchaser is able to deduct the interest portion of their payments on their federal income taxes. Their agent should make their purchaser aware of this advantage. The escrow company will send a 1098 interest statement to the buyer on or before January 31st of the following year.
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Additional Information On Bond For Deed
- Recordation: The Bond for Deed contract is recorded in both the Conveyance and Mortgage records in the Parish’s Clerk of Court’s office to protect the rights of both parties.
- Maintenance: The Purchaser is responsible for repairs, maintenance, insurance, etc., after the closing of the Bond for Deed contract.
- Insurance: Property insurance should be carried in the owner’s name with the Purchasers listed as Additional Insurers. Title insurance is also available to ensure the validity of the title that is to be conveyed to the Purchaser.
- Tax Deductible: The IRS treats a Bond for Deed the same as an installment sale for tax purposes.
- Power of Attorney: Our contract includes a Power of Attorney empowering Escrow Services, Inc. to transfer ownership of the property to the Purchaser upon full payment or refinancing.
- Bankruptcy: In the event the Seller files a bankruptcy action, the Purchaser is protected by the Bankruptcy Code.
- Death: The death of a Seller or Purchaser does not affect the validity of a Bond for Deed. As a “Heritable” contract under Louisiana Civil Code, the heirs inherit the benefits and the obligations of the Bond for Deed.
- Refinance: Mortgages to Buyers under a Bond for Deed qualify as refinances by mortgage lenders rather than new purchase loans. Payments to Escrow Services, Inc. are viewed as mortgage payments paid to an independent third party by mortgage loan underwriters.
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Lack Of Lender Approvals
There are also no lender approval issues. The contract is negotiated between the parties and is not dependent upon locating the proper financing. This makes the process much quicker and more certain. Since there is not an issue of Lender approval, the buyer can have less than perfect credit and still execute a bond for deed contract. The agent should make certain that the buyer will be able to make the monthly payments, but concerns like a past bankruptcy or other credit problems will not prevent a sale.
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Bond For Deed Vs Owner Financing: Pros And Cons
2 min read
While traditional mortgages and third-party lenders are the most common payment options for property purchases, these aren’t the only options available. Owner-financing options allow certain buyers, those who don’t have perfect credit or who may not meet other qualifications of traditional financing, to get home financing. A Bond for Deed arrangement, also known as a Contract for Deed, is actually a form of owner financing, but with one important exception: the seller retains the Deed and legal title to the house while transferring the physical possession of the house to the buyer. During the installment period the seller retains full legal rights though the buyer can make improvements on the property and live there. If the buyer defaults, then the entire property goes back to the seller. In some cases, such as Louisiana, the buyer is out for all of his improvements.
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How Are A Bond For Deed And Owner Financing Similar Or Different
Traditional owner financing is quite similar to a Bond for Deed, but oftentimes with a Bond for Deed, the deed and title are placed in third-party escrow to protect the parties’ interests. Payments are still made to the seller directly, and if the buyer defaults, the seller can institute legal proceedings to get the property back. In most states, the buyer can then countersue and claim reimbursement for all home restorations and improvements, provided they enhanced the value of the house.
Summary Of Seller Benefits
For sellers, the benefits include getting a better price for the property than an appraiser might estimate, gaining the ability to sell property in poor physical condition to a buyer willing to improve it, and the safety of knowing that the propertys title will not officially transfer until all payments have been made.
Another benefit is that if a buyer defaults on their obligations, the seller can quickly and cheaply reclaim their property. Forty-five days after the default letter is sent to the purchaser via registered or certified mail the owner may institute an eviction proceeding. This is significantly faster than to foreclose on a credit sale or other form of mortgage. It is also much cheaper than going to a sheriffs sale. Besides that, the seller is able to negotiate the sales price with the buyer.
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Good For Buyers With Less Than Great Credit
Since there is not an issue of Lender approval, the buyer can have less than perfect credit and still execute a bond for deed contract.
The agent should make certain that the buyer will be able to make the monthly payments, but concerns like a past bankruptcy or other credit problems will not prevent a sale.
Louisiana Bond For Deed Transactions
A Bond for Deed transaction is a Louisiana real estate contract in which the purchase price is paid in installments, and a title is transferred after the payments are made in full. In other states, a Bond for Deed is called a Contract for Deed or a Land Contract. These agreements are often used for Louisiana homes that are otherwise difficult to sell or finance.
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How Are Bond For Deed Contracts Serviced Who Collects The Payments And Maintains Proper Accounts
Collecting payments from buyers and maintaining accurate, objective accounts is not something that most Bond for Deed sellers consider until they are ready to transfer title during a closing. Southern Title, Inc. is proudly affiliated with Southern Loan Servicing, the states largest Bond for Deed servicing company and one of only eleven state-licensed escrow agents in Louisiana.
They will answer all your questions about the Bond for Deed transaction process and provide around the clock online account access after the closing of a property purchase. Existing Bond for Deed account holders may contact Southern Loan Servicing anytime day or night, to access their account.
Southern Loan Servicing collects the payments from the purchaser on or before the 20th of each month. The reason this is done is to provide enough time for a check to clear and a payment to reach the mortgage company before the 1st of the month. A 5% late fee is charged if the payment is not received by the 20th, and the late fee is increased to 10% if the payment is not received by the 1st of the month.
The importance of using a reputable service to maintain the integrity of the payment accounts cannot be over-stressed. Errors here can lead to lawsuits or mistrust between the parties.
Biggest Hazard For Sellers: Not Being Paid On Time
The biggest potential hazard to the seller is that the purchaser may not make their payments on time, and this may affect the sellers credit rating. The sellers can, of course, make the payment themselves in order to prevent it from becoming late. The sellers may use part of the down payment to maintain an extra payment in escrow.
We recommend that the Seller include a balloon payment term in the BFD contract so that they can limit their potential liability for this type of problem. Note that the escrow company should notify the seller immediately if a payment has not been received. We then mail a default notice to both the purchaser and seller via certified mail.
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Similarity And The Differences Between Bond For Deed And Owner Financing
People often get confused when it comes to these two terms. Bond for Deed is one type of owner financing, but there are others, such as a credit sale. The bond for deed requires the buyer to make all payments before the title transfers, while a credit sale transfers title at closing.
In both cases, the buyer makes payments to the seller directly, repairs on the property can be negotiated between buyer and seller without requiring an external appraisal, and terms of repayment can be non-traditional .
Bond For Deed Homes For Sale In Mandeville
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Pros And Cons Of Using Bond For Deed
The best thing about Bond for Deed is that both the buyer and the seller can work on the sales process much faster and with more flexibility than with a standard bank loan. In addition, because the Bond for Deed is an agreement between buyer and seller, bad credit is not an impediment to the purchase. People who had a bout of bad luck or a job loss or divorce can still buy a home.
Cons include the lack of a required appraisal, potential for more competition for a property when a seller is willing to owner-finance, and the relatively easy process of losing the title to the property if the buyer fails to make payments as required by the contract.
Purchaser Defaults Two Months Of Mortgage Payments Needed To Bring Current
The seller must also be aware that if the purchaser defaults on their obligations under the BFD contract, they will often have to pay approximately two months of mortgage payments to bring their mortgage current. Sellers should, therefore, set a Bond for Deed payment date before the first of the month so that any underlying mortgage payments due to the mortgage holder are not late. The purchaser has forty-five days after default to bring any unpaid payments up to date. Generally, the seller in a BFD purchase receives a cash payment for their equity at the closing, and their real estate agent may recommend that they save a portion of these sums with the escrow agent to be used to keep a mortgage current in case of default.
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