Many times a buyer doesn’t have the necessary capital, credit, or financing options to purchase a home. Seller or Owner Financing provides a solution for buyers who ordinarily wouldn’t be able to obtain conventional financing. However, in some situations seller financing makes the seller a lender. When this happens, it is not prohibited under the Dodd-Frank Act.
What is a mortgage originator?
A mortgage originator, according to the Dodd-Frank Act, is “any person who for direct or indirect compensation or gain or in the expectation of direct or indirect compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”
According to the act, any person who negotiates terms of a residential mortgage loan is considered to be a “mortgage originator.” This means that the person MUST be a licensed mortgage broker and comply with all the applicable laws. However, the act also provides for several exceptions where certain sellers can provide owner financing without being a licensed broker.
When can a Seller provide financing under the Dodd-frank act?
The mortgage originator law applies to those homeowners who are purchasing residential properties for residences. A residential property includes up to four units and applies to homes, condominiums, mobile homes, townhomes, apartments, and other similar related properties.
There are is a one property exception to the “mortgage originator” rule. This means that a seller who finances credit to a buyer, secured by a mortgage will not be considered a “loan originator” if:
- They are natural person, estate or trust
- They provide financing for only one person in a twelve month period
- They own the property securing the mortgage
- They did not construct or act as the contractor for the construction of the property
- Repayment of the loan must NOT result in negative amortization
- Balloon payments are allowed; however, the term of the balloon is NOT clear. Most practitioners believe that no shorter time period than 5 years should be used
- While the act does not prohibit adjustable rates, a fixed rate is suggested. The act has restrictions, limitations, and caps on rate changes.
- The seller is NOT required to investigate the buyer’s ability to repay the loan
An additional exception is the Three Property Exception. This is applicable when the seller can extend and will NOT be considered a “loan originator” when:
(a) they are a natural person, estate, trust or an entity;
(b) they provide financing for three properties or less in any twelve month period;
(c) they own the property securing the mortgage;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) the loan must be fully amortizing and there are no balloon payments or structures allowed;
(f) while the Act does not prohibit adjustable rates, a fixed rate is suggested. In this context, limits and caps are required’
(g) the Seller is required to make a reasonable investigation regarding the Buyer’s ability to repay the loan. Although formal documentation is not required, the investigation should be done in good faith and the results should be maintained.