Buying a House With a CD

Flat view of a CD-R, with interference colours...

No, not a music CD.  And also no, not a Certificate of Deposit.  I’m talking about a Contract for Deed.  Most people don’t know much about CD’s but it can be an excellent way to buy, or sell, a home in some cases.

In the simplest example, the seller owns the home free and clear. He (she) sells the home to the buyer with the buyer paying an agreed upon down payment and then making payments, normally monthly,  to the seller.   The seller retains legal title to the home while the buyer gets equitable title.  When all conditions of the sale have been met, the legal title transfers to the buyer.  Many times the CD will allow the buyer to make payments for a set period of time such as five or seven years with a balloon payment then being due for the balance.  Most likely the buyer would obtain a new mortgage to pay off the balloon balance.

Advantages of CDs are numerous.  The buyer can have less than perfect credit and still buy the home since a bank is not involved.  There is no appraisal required.  Paperwork is minimal.  An advantage for the seller is the ease of which they can recover the property in the event of a default by the buyer.  Since the seller still has legal title, if the buyer fails to make payments as agreed, all they have to do is give written notice of default, then sixty days later they get the house back.  They also get to retain all money, including the down payment, paid by the buyer.

A sale using a CD gets to be a bit trickier if the seller has an existing mortgage on the home.    Most mortgages have an acceleration clause (commonly called a due-on-sale clause) that requires the mortgage to be paid in full in the event the home is sold.  If the bank holding the mortgage agrees that they won’t enforce the acceleration clause, a CD can still be used. It’s still a risky proposition though.  What happens if the seller fails to pay on his mortgage, even though the buyer is faithfully making his payments on the CD to the seller?  The bank can foreclose on the home and the buyer could lose the home even though he did nothing wrong.  Based on this one thing, I personally would recommend using a CD only when the home is owned free and clear by the seller.  That’s just my opinion.  It’s just a little too risky for me otherwise.

Hope this gives you some idea of how a CD works.  Everything I’ve said about them is based on how they work here in the frozen tundra of Minnesota.  The laws likely vary in other states.  If you’re interested in finding out whether you can, or should, consider a transaction with a CD you should consult with a knowledgeable real estate agent and/or attorney in your state.



About Bob Gilbert, GRI

Realtor with Edina Realty, Prior Lake, MN
This entry was posted in Financing, Home Buying - General, Selling Your Home and tagged , , , . Bookmark the permalink.

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