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  • Randy Rodenhouse

Seller Financing Rules (Dodd Frank Guidelines)

OVERVIEW OF DODD-FRANK?


  • 2010 - Barack Obama signed into law the 2,314 page Dodd Frank Wall Street Reform and Consumer Protections Act.

  • Dodd Frank Act (DFA) restructures the oversight of financial regulation and amends the TILA (Truth in Lending Act).

  • These laws effect seller financing deals originated on or after January 10, 2014 and occupied by buyer as primary residence. i.e. Owner occupied.

  • Commercial transactions (which includes rentals, fix and flip, etc.) and the sale of raw land are not effected by DFA.


WHAT IS DODD FRANK AND HOW AFFECT SELLER FINANCING?


Part of DFA is requirement that a licensed mortgage loan originator (MLO) must oversee originations in which the buyer intends to occupy the property as their primary residence.

However, 2 exemptions to this rule are:

  1. “Single property exemption” every 12 months

  2. “Not more than 3 properties exemption" every 12 months


Single Property Exemption Explained

Any nature person, estate or trust who provides seller financing to an owner occupant only one time in any 12 month period. Cannot be a LLC, corporation, etc. Loan can include a balloon and seller does not have to prove borrowers ability to pay. However, there are some restrictions as shown below:


  • Interest rate fixed for first 5 years and no negative amortization.

  • Adjustable rate allowed but restrictions on the amount of increase and frequency of rate adjustments.

  • Seller must not be the builder.

  • Seller must have owned the property.


Not More Than 3 Properties Exemption


Any person or entity cannot provide seller financing to an owner occupant more than 3 times in a 12 month period without using a MLO. The loan cannot include a balloon. Seller does have to prove borrowers ability to repay. In addition, there are the same restrictions as we discussed above for the single property exemption and it applies here as well:


  • Interest rate fixed for first 5 years and no negative amortization.

  • Adjustable rate allowed but restrictions on the amount of increase and frequency of rate adjustments.

  • Seller must not be the builder.

  • Seller must have owned the property.


More Than 3 Properties You Must Use a MLO and Comply With All Regulations Such As:


  • The loan cannot include a balloon.

  • Seller does have to prove borrowers ability to repay.

  • Interest rate fixed for first 5 years and no negative amortization.

  • Adjustable rate allowed but cannot adjust more than 2% per year or more than 6% over life of loan.

  • Seller must not be the builder.

  • Seller must have owned the property.


The “Ability To Repay” rule is simply you checking to ensure that the buyer has enough income or resources to comfortably make the payments without experiencing financial hardship. This assessment is important to minimize the risk of default or non-payment, protecting both parties involved in the transaction.

To determine the buyer's ability to repay, several factors are typically considered:


  1. Income: The buyer's regular income is evaluated to assess its stability and sufficiency to cover the loan payments. This can include employment income, self-employment earnings, rental income, or any other reliable sources of funds.

  2. Expenses: The buyer's existing financial obligations and living expenses are examined to understand their financial commitments and determine if they have enough income remaining to afford the payments.

  3. Credit history: The buyer's creditworthiness is often considered, including their credit history of managing debts. A good credit history indicates a responsible borrowing behavior and increases the likelihood of timely payments.

  4. Down payment: The buyer's ability to make a down payment or provide a significant upfront sum may demonstrate their commitment to the purchase and reduce the risk for the seller.


By assessing these factors, the seller can gain confidence in the buyer's ability to repay the loan, making the seller financing arrangement more secure. It helps ensure that the buyer can fulfill their financial obligations and reduces the chances of default or financial strain, benefiting both the buyer and the seller.

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