Seller Financing

ALERT -- RESIDENTIAL SELLER-FINANCING CAUGHT IN THE FRAY OF REGULATORS

Not only at the Federal level, but at most State levels as well, residential seller-financing is now regulated. This is the result of stringent home lending regulations that resulted via post-recessionary government legislation.

In my opinion, seller-financing has always been self-regulating and contributed little or nothing to the mortgage crisis. Be that as it may, the Dodd-Frank Act encompassed seller financing of homes that buyers would inhabit. The Consumer Financial Protection Bureau (CFPB) was established to protect homebuyers, and the law must be followed.

The main thrust is ensuring strict requirements for licensing of mortgage originators. This protects consumers by giving them proper disclosures and prevents “loan abuse.” Because the seller is “creating a loan”, so to speak, the seller can be considered a mortgage originator, requiring a mortgage license for the seller.

There could be limitations as to what terms you are allowed to offer your homebuyer. For example, there are rules against negative amortization, some limits on variable interest rates, and possible prohibitions of balloon payments.

How can a seller handle this?

Most sellers only seller finance once in their lives. There can be exemptions for these isolated transactions. There are possible waivers. You will have to ask your attorney for advice about your particular situation. A seller who does multiple sales can fall into more stringent compliance.

You may also consider hiring a licensed mortgage originator to provide the necessary disclosures.


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As a seller-financer, you own the real estate and sell it to your buyer. The buyer pays you a down payment, and you finance the rest by accepting time payments for the balance due, with an acceptable interest rate and other terms. A document (such as a mortgage or deed of trust) is recorded against the real estate for mutual protection.

According to Regulation Z of the Truth in Lending Act, if you sell a dwelling to a buyer who will use the property as a residence, or intends to use it as a residence, you must have a loan originator license, or hire a loan originator to complete the necessary paperwork.

There are exemptions from these federal law restrictions requiring a loan originator license. There is a 1-Property exclusion and a 3-Property exclusion:

1 Property Exclusion:

You must be a natural person, an estate, or a trust. You cannot be an LLC, corporation, partnership or other entity.

You have to be the owner of the property you are selling and financing.

You cannot have seller-financed the sale of any other real estate within 12 months prior to selling your property.

You cannot have constructed or acted as a contractor for the construction of a residence on the property in the ordinary course of your business.

The repayment schedule cannot result in negative amortization (meaning your buyer owes you more money every month because the payment is not enough to cover the interest).

The payment terms have to have a fixed rate of interest, or if an adjustable rate after five years subject to reasonable annual and lifetime limitations in increases in interest rate.

Balloon payments are allowed.

You do not need to determine your buyer’s ability to pay the debt.

3-Property Exclusion:

Balloon payments are not allowed, and the note must fully amortize over a specified period of time.

This exemption applies to an LLC, corporation, partnership or other entity. However, an individual, estate, or trust can also use this exemption.

The payment terms have to have a fixed rate of interest, or if an adjustable rate after five years subject to reasonable annual and lifetime limitations in increases in interest rate.

You have to be the owner of the property you are selling and financing.

You cannot have seller-financed the sale of 3 properties within 12 months prior to selling your property.

You cannot have constructed or acted as a contractor for the construction of a residence on the property in the ordinary course of your business.

You must determine your buyer’s ability to pay the debt.

THIS INFORMATION IS MEANT TO BE ACCURATE, BUT IS NOT TO BE CONSIDERED LEGAL ADVICE. YOU SHOULD ALWAYS CONSULT YOUR ATOTRNEY ABOUT YOUR PARTICULAR TRANSACTION TO ENSURE YOU ARE FOLLOWING FEDERAL LAW. YOU ALSO NEED TO ASK YOUR ATTORNEY ABOUT STATE LAW!


We are experts in seller financing. Lorelei Stevens is licensed by the State of Washington to teach seller financing to real estate agents to fulfill their continuing education requirements. (Instructor ID# 10726)

Selling your note should be a trouble-free experience. By learning a few basics about seller financed notes, you can prevent problems and get the best price for your note.

You can prevent many problems by creating the note properly. If you make mistakes in creating the note, they will remain to haunt you. Mistakes in your note will likely lower its value, and could even make it unsalable. Here is what you need to know to create your note without mistakes:

First, when a buyer makes an offer on your property, get a credit report on the buyer. To learn how to check your buyer's credit, click here.

Second, get financial information about your buyer's income, expenses and assets because:

(1) You want to determine your buyer's ability to pay you.

(2) Some states' laws allow for "deficiences." In a nutshell, this means if you take the property back and don't get all your money, you can possibly get the rest of your money from the buyer's other assets.

For a form Uniform Residential Loan Application, click here.

For more information about "deficiences," click here.

Your note should be negotiable. This is a legal term and it does not simply mean "bargaining" as in the common usage. "Negotiable" is a complex term that requires careful attention in order to correctly create a note. For information on how to make a negotiable note, click here.

Your buyer may want to take over your payments. This is called an assumption. For information on what you need to know about assumptions, click here.

Your buyer may not have enough money to pay a full down payment and ask you to accept a second lien on the property to make up the difference. For what you need to know about accepting second notes, click here.

If you are paying on an existing note, your buyer will do best by giving you a larger note that pays on your smaller existing note. This is called a "wraparound." To learn how wraparounds work, click here.

Most notes are paid in full. Occasionally, however, there may be a problem where your buyer doesn't pay, and you must deal with the default. To learn how to deal with defaults, click here.

Use this web site to sell your note for fast cash to a family business buying notes since 1971.