What is a Bond For Deed? (part 1)
A Bond for Deed is a Louisiana Contract to sell property in installment payments, transferring title after the price is paid in full. Payments must be made through an “escrow” agency, who makes monthly payments to the creditor, and issues IRS 1098 interest reports. The escrow agency is responsible for sending all required notices to buyer and seller.
What the seller needs to know:
- Seller can earn interest on payments made by the Buyer. The sales price is not dependent on the mortgage balance owned to his lender.
- Permission of Seller’s mortgage company is not required unless the mortgage specifically prohibits a Bond for Deed transaction.
- Cancellation of the Contract for non-payment is cheaper and faster than foreclosure.
- If Buyer defaults, all payments made to seller are forfeited, including any down payments made by Buyer.
- Seller is responsible for all payments to Mortgagee, even if Buyer has not timely made the payments.
- Seller must notify Escrow Agent if payments to Mortgagee change due to escrow shortages.
What the Buyer needs to know:
- Buyer can claim homestead exemption while making payments, even though he does not own title, if he lives on the property as his primary residence.
- Buyer can claim IRS interest deductions on tax return.
- Buyer is responsible for repairs, maintenance, termite inspection, insurance etc.
- Insurance coverage must list owner as primary insured and purchaser as “additional insured”.
- Title insurance is available.
- Bond for Deed is a mechanism used temporarily to bridge gaps while waiting for favorable market values and interest rates.
- In the event Seller files bankruptcy, the Buyer is protected by the Bankruptcy code.
- Death of the Seller does not affect the validity of the Contract, as the heirs of seller inherit the benefits of the Contract terms.
- Mortgages to Buyers qualify as refinances, rather than new purchase loans. Payments made under existing Contracts are treated as mortgage payments
Information prepared by Sheila Bonnette, Choice Title Inc.
