Are You Safe to Sell Under the SAFE Act?

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Every workshop I teach lately has at least 10 investors who ask me if I am familiar with the SAFE Act (Secure and Fair Enforcement Mortgage Licensing Act) enacted by the Department of Housing and Urban Development (HUD) and does it spell the end of seller financing. Many of you know that in today’s market selling real estate for full price is difficult especially with the amount of bank inventory making its way into the system and the financing restrictions banks have imposed upon would be borrowers. Thus, you can understand why investors, seeking to forego traditional financing arrangements and instead finance the purchase themselves (carryback financing), in order to entice potential buyers to buy, have expressed grave concern over the impact of this Act. Many have even proclaimed that seller financing is dead.

This notion is completely false.

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Background on the SAFE Act

The SAFE Act was emplaced in order to aid in the recovery and revitalization of our residential housing market.  HUD’s regulations state that "the SAFE Act strives to enhance consumer protection and reduce fraud by directing States to adopt minimum uniform standards for the licensing and registration of residential mortgage loan originators and to participate in a nationwide mortgage licensing system and registry database of residential mortgage loan originators. It sets forth a nationwide minimum standard for the licensing and registration of state-licensed mortgage loan originators." This language is straight forward in its directive to regulate mortgage loan originators and not investors. In fact, a mortgage loan originator is defined in Section 1503 (3)(A)(i) of the SAFE  Act as "an individual who takes a residential mortgage loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain."  This definition is the cause of much of the confusion amongst investors who think that they can no longer sell real estate and finance the purchase themselves without a license from their state. Again, I think their fear is misplaced.

In carryback financing, the seller acts in place of the bank however, a seller does not receive "compensation or gain" from negotiating loans with buyers. Seller’s compensation is derived from the sale of real estate. To classify this gain as compensation from negotiating a loan is clearly outside the intent of the parties. An interesting thought does occur and that has to do with points charged on the loan. If a seller charges points for the financing then I believe a case could be made for inclusion of the transaction under the SAFE Act guidelines.

Obviously HUD will need to issue further clarification regarding specific transaction to ease the concern of many investors; however, I believe their intent is not to disallow owners of real estate to personally finance their sales. In fact, the HUD has already taken steps to address some concerns by placing a caveat in the SAFE Act specifically for residential homeowners. In situations such as when providing financing to a buyer for the purchase of a homeowner’s residence, a license is not required.

Essentially, as long as you are selling your residential real estate (defined as real estate consisting of 4 units or less), you should not be deemed a mortgage loan originator. One final point, the SAFE Act does not apply to land — that is crystal clear.

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  1. Clint

    Thanks for diving into this issue. I’ve been looking for someone with legal or financial experience to assess the SAFE Act and its effect. Here’s my inclination – correct me if I am wrong.

    The SAFE Act in and of itself does not regulate anything. It was merely a precursor encouraging states (and eventually fed) to regulate loan origination. Each state (and eventually fed) will enact their own laws regulating loan origination. It is my understanding we need to be aware of our state’s interpretation of this regulation, if applicable. It also suggests that lenders’ loan originators must be licensed according to a standard set of policies.

    There is a lot of confusion surrounding the act and the associated resulting Bills that are making their way through congress. Many people do believe that these laws will apply to them if they are not selling their ‘primary’ residence, ie: an investor selling an investment property with carry-back financing. In fact I believe the wording was not residential but rather residence:

    The commercial context implied by the taking of an “application” is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence. The frequency with which a particular seller provides financing is so limited that HUD’s view is that Congress did not intend to require such sellers to obtain loan originator licenses.

    Technically it seems to say (by method of exclusion) that an investor should be a licensed loan originator to offer financing for sale of investment property.

  2. Our REIA had the gentleman from the Texas Department that will be enforcing the law. He was very clear that this law did require real estate investors to be licensed as loan originators if doing seller financing on 1-4 units.

    • Chuck, Each state is responsible for enacting and enforcing their own guidelines. Texas may be taking the approach that anyone who enters into owner financing must be licensed unless the property is a personal residence. Originally personal residence was included as a transaction that required licensing however HUD retreated on this stance. It comes down to this – if you state wants you to get licensed then if you are concerned then you had better get licensed. In my view the intent behind the SAFE act was to reign in unsafe lending practices that resulted in the mess we are still working through. Thus, the only real threat as I see it comes from attorneys who may use the Act against you to prevent foreclosure on their client’s home or to get out of the agreement.

  3. Taylor White, PHD on

    I remembering when I got in the real estate game in 2002 – and listening to people talk about seller financing seemed like they were talking in a strange language.

    Why not just do stated/stated?

    Its funny how we have now come full circle…again.

  4. TN requires a license for seller financing of investment property if the buyer intends to use it as a residence. The TN legislation was enacted to bring the state in compliance with the federal guidelines, so TN apparently believes that the SAFE Act does restrict seller financing of investment property. The TN legislation was recently interpreted by the state Attorney General in opinion # 10-93.

    • Tim,
      Tell me this isn’t true!! I just heard about a TN agent getting fined $10K for selling an owner-financed property. Got any resources to confirm the TN legislation? When did this become law? ………… there goes my retirement plan!!

  5. With all due respect Clint, to me, your answer was as clear as mud. You may be mixing perceived intent with reality. The intent may be directed solely at legitimate licensed loan originators, but do you really trust federal and state DRE’s to be that benevolent and forgiving to the common man attempting a seller carry contract? Do you have that much faith in this legislation that you or any other reader in this forum really has nothing to worry about? If I were a seasoned real estate attorney (which I am not an attorney at all) counseling my real estate investor client, I would tell him to sweat bullets if he was thinking about doing a seller carry contract. Maybe I’m just paranoid, but I’m sweating just writing this response.

  6. I have a client who has made a practice of buying real estate, fixing it up and selling it owner/financed. As a realtor, I do not participate in the selling of these properties, but I do help him buy land to build or buy houses to rehab. He may do as many as 5 or 10 per year. All single family residences. What is his impact? Will he need to get licensed?

  7. Hi Clint
    This was my first blog search on the SAFE Act and I read your comments. I definitely appreciate you taking the time to provide sound input. You mentioned that “SAFE Act does not apply to land — that is crystal clear.” But you didn’t elaborate further. Can you (or anyone) please help me understand? We have a bunch of vacant lots we wish to sell, and owner-finance. It would certainly be considered investment property, but there is no way for us to prevent a buyer from building a home on it one day. I read in the STATE MODEL LANGUAGE FOR IMPLEMENTATION OF PUBLIC LAW 110-289, TITLE V—S.A.F.E. MORTGAGE LICENSING ACT, under MSL XX.XXX.030 DEFINITIONS— (11) RESIDENTIAL MORTGAGE LOAN: The term ‘‘residential mortgage loan’’means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the Truth in Lending Act) or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined). And(12) RESIDENTIAL REAL ESTATE: The term “residential real estate” means any real property located in [State], upon which is constructed or intended to be constructed a dwelling.
    Can we advertize and sell our property online and carry paper without being in violation of this Act? Thanks.

  8. Clint,

    I found your blog entry while researching the question of whether the SAFE Act would apply to a resident owned manufactured housing cooperative in Florida financing the purchase of membership shares in the cooperative. While the membership share is appurtenant to a long term leasehold interest in a lot in the community, only the purchase of that membership share and appurtenant leasehold interest would be financed. The manufactured home installed on that lot is not part of the financing arrangement. I’ve continuously believed that this type of financing arrangement is not subject to the SAFE Act and your informative and concise entry seems to support my belief. Thanks and congratulations on a well-written post.

  9. To Clint,
    Great feedback on the SAFE act.
    Can you clarify how it is “clear’ that the SAFE act does not apply to land when I read:

    Sec. 1503. Definitions.
    (8) RESIDENTIAL MORTGAGE LOAN.—The term ‘‘residential mortgage loan’’ means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the Truth in Lending Act)
    or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined).

  10. Respectfully, I offer these thoughts.

    When the government decided licensing was required to practice medicine, sell insurance, other types of professional licensing did it only apply to a select class while excluding others performing the same task? Everyone, whether it be a loan originator, investor, bank, etc. originating a loan is doing so for compensation or gain. Granted, the the investor is generating the loan for dual reasons, markup on the sale and the gain from interest income. Often there is a spread on interest income for the investor, just like a bank.

    I don’t like this law – I fell it is taking things too far. I understand the personal property rights argument. But like it or not, government has deemed society needs additional rules to protect public welfare in regards to mortgages lending.

    I do not believe, nor do I see any evidence, that because someone is an investor that they are excluded. What makes the investor special? In fact, via the fact that the only exception that exists is for sale of personal residence, I believe investors are included and should take caution accordingly.

    In my state, if one violates this law, they cannot legally charge interest and can be fined $1,000 minimum and $25,000 maximum. They are also held responsible for investigative costs.

    I hope Mr. Coons is right, but I don’t see this the same way. I also feel land marketed and sold as building lots requires a license per the SAFE Act. And I think the next thing coming down the pike is that lease option with high deposits and rent credits will be deemed a form of financing subject to the SAFE Act.

  11. Dave Salcido on

    I am sure many investors and homeowners are not 100% convinced that a seller carry transaction does not constitute a loan that is subject to state loan originator licensing. DRE’s with axes to grind can scare the strongest of heart. So, barring clarity that a six year old can understand, we really have four choices:
    1. Don’t ever sell with a seller carry contract
    2. Sell with a seller carry contract and take your chances at maybe breaking the law
    3. Become a state certified loan originator and pay the price for compliance
    4. Avoid selling altogether

    Personally, I like number 4. I prefer to place the property into an intervivos land trust, transfer the deed to a non profit corporate trustee (title in escrow), name the new occupant as my trust co-beneficiary with a Use, Occupancy and Possessory Agreement (not a rental) after they make a contribution to the trust (not a down payment). What do you get? Full market value, cash at closing, cash flow, asset control without giving up title, protection of the investment against liens, judgments, lawsuits and since a sale never took place, no taxable event (except for cash at closing and monthly cash flow). AND no DRE issues because this is not a realty transaction. It’s personalty!

  12. Hi Dave: Can you please provide more info about the intervivos land trust or a link to explain this in more detail. Also where to find the docs to do deals in this manner? Thanks

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