If nothing else, the Dodd-Frank Act certainly complicated issues around seller financing. The overall intention was to protect consumers from getting into loans that they were not likely to be able to repay. That’s all fine and good. However, the convoluted law may be doing more harm to difficult to qualify people than it’s doing to protect others.
The final rule took effect on Jan. 10, 2014. Ask four different financing professionals what it means to seller financing and you’ll likely get four different answers. Books will be written about this subject and eventually court cases will define what it finally means. This article is only a small glance at how this will roll out.
For those only occasionally selling a property using seller financing it doesn’t have much impact because the new rules don’t apply if credit is extended to consumers fewer than 5 times during a 12 month period. Wait, another part of the regulations says an individual (or estate or trust) is not a mortgage originator if no more than 3 properties are financed in a 12 month period of time and certain other requirements are met. Oh, and it does prevent anyone not using a licensed loan originator from including a balloon payment as part of the loan terms.
There is a niche real estate investing industry where investors regularly buy and flip houses using seller financing and then sell the notes on the secondary market to other investors. This has become a very lucrative market in light of the tightened mortgage qualifications over the past several years. These sales typically go to people with damaged credit, undocumented income, people that were foreclosed on, and having other negative factors in their financial history. The Dodd-Frank Act has essentially locked these people out of the homeownership market although the seller financer is the one really taking the risk. At the same time, seller financers are helping people on the fringe become homeowners. Of course, there are a few in the industry that prey on these people, as there are in any industry, but the vast majority operate with ethical intentions.
These investors regularly flip more than 3 or 5 houses a year. As a seller financer, are they a loan originator that would be limited to 3 of these transactions a year? Or are they individuals following a different set of rules? What the most successful seller financers are now doing is having a licensed loan originator write and document all of their seller finance contracts. Hopefully, licensed mortgage originators understand and comply with the Dodd-Frank Act but no one can be sure at this point in time.
Another deterrent to seller financing is that even when not considered a loan originator because fewer than three houses are sold in a 12 month period, there can be no balloon payment as part of the loan terms. The loan must be fully amortized. This means that an individual selling a once personal residence or investment property on installment payments cannot have a balloon payment as part of the terms of the seller financing. However, they do have the option of having a licensed loan originator qualify the loan to determine if the buyer is likely to have the ability to pay off the balloon payment or refinance the loan at a future date.
The overall intent of these regulation changes are to protect consumers and avoid another housing collapse. There is flexibility for lenders to set many of their own standards within certain parameters. Probably the two biggest impacts to those in the niche seller financing industry are that loans must now be originated by a licensed loan originator (an added expense) and that sales cannot be made without full documentation of income and assets demonstrating the ability to repay the loan over the amortized time period.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.