Contract for deed sale agreements offer an opportunity for a buyer and seller to skip the lending approval process and deal directly with each other. Unfortunately, when the buyer is unable to make payments on the contract, he not only forfeits the home but the payments he made as well; whether or not the forfeiture will affect credit depends on whether the seller reported the payments to the credit bureaus.
Contract for Deed and Credit History
Sellers are not usually able to report a buyer's contract for deed payments to credit bureaus, because reporting is permitted only by licensed lenders. However, if the seller used a private loan servicing company to collect the payments, administer escrow and provide tax statements, then a strong possibility exists that the payments have been reported all along. If the buyer defaults, the servicer is obligated to report it. However, if the "loan" isn't being report to the credit bureaus, then a forfeiture would not affect credit.
When It Goes Well ...
Buyers frequently like contract for deed agreements because it permits them the opportunity to enjoy the advantages of homeownership, including reaping the tax advantages of deducting mortgage interest and property taxes. It also affords the chance to improve credit; buyers who couldn't qualify for a regular loan may use the equity that accumulates during the contract period to refinance at a later date. If the buyer makes timely payments and these payments are recorded with credit bureaus, the likelihood that a refinance will occur increases greatly, because timely home loan payments increase a buyer's credit score significantly.
... And When It Doesn't
Unfortunately, the same reasons that cause a buyer not to be able to secure a loan at the beginning of the term are the same reasons that prevent him from getting refinanced. If he defaults on payments and cannot resolve the situation, then the seller may initiate forfeiture proceedings. In contract for deed forfeiture, the property is returned to the seller, who keeps all of the payments made as liquidated damages. Forfeiture actions are relatively fast and cheap, when compared to foreclosure. Forfeiture proceedings will not be reported to credit bureaus if the payments haven't been recorded.
Foreclosure
Contract for deed foreclosure proceedings are similar to forfeiture in that the buyer loses the home. However, foreclosure accelerates the balance due so that the buyer is forced to pay off the entire amount immediately; if he cannot, the home will be sold, and it's possible that a judgment against the buyer may be entered. However, just like forfeiture, foreclosure will not be reported if the payments haven't been.
Keep in mind that a buyer may opt to self-report his own timely payments on a contract for deed. Should the buyer eventually default, he may stop self-reporting but should be prepared to answer questions about the loan when the time comes to apply again.
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