South Bend Home Loan

Thursday, June 5, 2014

Seller Beware! New Risks To Seller Financing

I received an email from a well respected real estate attorney in our area this week that addressed the impact of the Dodd Frank Act on seller financing.  It is critically important information and he has given me permission to share it with you.  If you work with investors who consider offering this financing option, you need to read this:

There is a new federal law that makes it very dangerous for real estate owners to provide seller financing for the sale of any property where the purchaser is going to live in the property.  The law is the mortgage portion (Title 14) of the Dodd Frank Act and became effective on January 10 of this year. 
Here is the basic outline of how this law works.  The seller who is willing to take payments over time must now hire someone to give the buyer advice on whether or not the buyer can afford the payments the seller is requesting.  This person is called a mortgage loan originator, even if there is no mortgage involved.  The seller pays the mortgage loan originator whatever his or her fee is.  People in the real estate industry are predicting that these fees are going to be running between $750 and $1500 per deal.  But that assumes you can find someone with the required license.  After months of searching I have still not been able to find anyone any place in the country who is licensed and willing to do the consulting for a private deal.  These people are going to start sprouting up, but if they exist now, I have not been able to find any of them.
If you, as the seller, do not hire a mortgage loan originator to advise the buyer, then after the deal is cut and the buyer has moved into your house, the buyer can sue you and recover back all of the finance charges (interest and any other fees) and force you to pay his attorney fees for suing you.  Further, a new bureau of the federal government is going to monitor this process and help your buyer if needed to bring this lawsuit against you.  Already this bureau (called the "Consumer Financial Protection Bureau") has a place on its website for visitors (your buyers?) to click in order to file a complaint online (from the comfort of the home you have sold to them).  
Even if you hire a mortgage loan originator, that persons cannot bless the transaction if your documents call for a balloon payment.  Balloon payments are prohibited, which means that you must carry the paper throughout the full term of the amortization.
Further, if your buyer defaults and you have to foreclose, your failure to comply with the Dodd Frank Act can be used as a defense.  If that occurs, I promise that you will be tied up in court for months or years just trying to get rid of this person. 
Here is a partial list of the transactions which you can no longer do without hiring a mortgage loan originator:
  1. Lease Option where any part of the payments go toward principal reduction
  2. Some other lease option arrangements (if it looks to the court like it was really intended to be a sale over time).
  3. Land Contracts
  4. 1st mortgage where you agree to take your payments over time
  5. 2nd mortgage where you agree to take your payments over time or at some time in the future (like when the 1st mortgage has been paid).
Note - buyers of mortgages which were written after January 10, 2014 also must comply with the act and are subject to the same defenses as the original mortgage holder.
There are few exceptions to this law.  First, seller financing on non-owner occupied houses is still allowed.  Financing on commercial properties is still allowed.  Financing of other investor's purchase of your property is still allowed (but they cannot provide seller financing to their buyers).  Seller financing of the seller's own personal home (whether held individual or in a family trust) is allowed provided the seller sells no more than one home in any 12 month period.   
It is hard for me to comprehend or describe how this law is going to change our industry.  The State of Colorado has already issued a caution to its realtors not to be involved in any seller financing deals because of the changes effected by this Dodd Frank law.   Any potential buyer who has had a foreclosure in the last three years or a bankruptcy in the last two years is probably going to be prevented from buying any house in which to live.
Isn't this interesting information?  If your seller is wanting to offer financing on the home they live in and they are only doing it this one time, they appear to be exempt.  If your client is an investor and the home was not their primary home prior to the sale, though, this is a deal-changer.
Feel free to forward it to anyone who you think would benefit from knowing it!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.