How Dodd Frank Law Changes Seller Financing for Investors

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I was actually in the process of negotiating a seller finance with one of my tenants and was halted in my tracks. I was reminded that the new Dodd Frank legislation went into full effect on January 10th of this year and will have a huge impact on investors who use seller financing as an exit strategy. While much of the Dodd Frank discussion has been centered around more stringent debt to income requirements for conventional borrowers, I thought it would be helpful to discuss new guidelines surrounding seller financing.

While the seller financing portion of the 900 page Dodd Frank bill is a relatively small fraction of the legislation, it has huge implications for many investors around the country. For many investors, using short-term seller financing plays a major role in their investment business. Going forward, most of these investors will have to re-think how to structure these types of deals (if at all).

At a high level, the new rules break down sellers into 3 distinct buckets:

1.) Individuals and Trusts that seller finance one property or less per year (to an owner occupant)
2.) Individuals and Trusts that seller finance one to three properties per year (to owner occupants) AND and LLC, partnership or Corporation that seller finances less than three properties per year (to owner occupants)
3.) Basically any person or entity that seller finances more than three properties per year (to owner occupants)

As a point of clarification, these rules apply when seller financing to an owner occupant. This is not the same as lending on a commercial property or to another investor who does not intend to occupy the property.

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Under this bucket, the following rules are worth noting:
*The Note can contain a balloon (A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity.)
*Seller does not have to prove borrowers “ability to pay” (for more information on what this actually means –
* Interest rate must be based on index (ex. prime, T-bill, etc) and must be fixed for first 5 years. After 5 years, the rate can only adjust 2 points per year to a max of 6 points above original interest rate.


Under this bucket, the following rules are worth noting:
* The Note cannot contain a balloon payment (this is big deal for investors who typically don’t want to hold a note over the entire amortization schedule)
* Seller does have to prove borrowers “ability to pay”
* Interest rate must be based on index (ex. prime, T-bill, etc) and must be fixed for first 5 years. After 5 years, the rate can only adjust 2 points per year to a max of 6 points above original interest rate.


For any individuals or entities that make more than 3 loans per year, the new law requires that a Mortgage Loan Originator be involved to complete the transaction. Loan requiremenst are the same as bucket 2 (ie. no balloon payments, prove ability to pay, interest rate restriction)

There you have it – probably clear as mud. This is by no means a comprehensive look at the new law, but probably the most pertinent guidelines for investors who use seller financing.

My advice would be to find a good attorney to help write the note on your first deal under this new law …. and for those investors who do more than three a year, I’d find a good MLO (mortgage loan originator) to help oversee your deals.

Related: How the Dodd Frank Act Will Impact Your Real Estate Business

Photo: Jenni C

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.


  1. I think the biggest deal killer in this bill is the interest rate restrictions. Even if you jump through all the hoops, you would probably wind up with a very small cash flow if any.

    I suppose this strategy might work for investors who intend to keep the note long term and begin to see some modest returns after year 5.

  2. Just another example of government legislating in order to prevent the future from happening.
    Next will be a bill to correct the issues Dodd Frank creates. Now who wants to lend money at a low interest rates to buyers with no or bad credit?

  3. “As a point of clarification, these rules apply when seller financing to an owner occupant.”

    So if you are buying an investment property and have the seller carry back the financing, you are not affected.

    • Jeff Rabinowitz on

      Doug, if you purchase a note that was originated improperly the borrower’s remedies may be visited upon you. Also, if an originator sells a note that was originated improperly he may still be held liable for the borrower’s remedies. Tread carefully.

  4. Jeff Rabinowitz on

    Ken, I am not an expert on Dodd-Frankenstein. I attended a seminar where the speaker noted the law states a 60 month minimum before a balloon could be due. It would seem 60 months and 5 years is the same but it may be safer to have the balloon due at 61 months as it could be a violation if it is due in 60 months. I expect there will be no shortage of borrowers suing note originators as the law actually creates a body that teaches borrowers how to sue if they think their lender has not complied.

  5. Great article Ken, informative and concise.
    Does Dodd Frank apply to an investor buying a property as an investment too? In other words If I were to buy a property financed by the seller will they have to have the 60 months terms indicated on the note? Is there any penalty that the government is imposing if the buyer finances out of the note early with conventional financing?
    Does D-F apply to restructuring non performing notes too?

  6. Stephen Watkins on

    * Interest rate must be based on index (ex. prime, T-bill, etc) and must be fixed for first 5 years. After 5 years, the rate can only adjust 2 points per year to a max of 6 points above original interest rate.

    So is this to be read as interest rate must BE that of the index chosen or could it be index + 2% (or whatever you choose) fixed for 5 years?

  7. Hi Ken, Everyone is weighing in on Dodd Frank, DF so thanks for your piece. I’d like to add that there’s missing issues in this article. DF invents new terms: qualifying mortgage (QM), high expense mortgage and others and lender categories. You mentioned just the lender categories.
    Other requirements: use of a Loan Servicer. You mentioned needing to use a Licensed Mortgage Loan Originator LMLO but a servicer.
    What’s still unclear is filling in the matrix of: high expense mortgage and 1-3 per year from an entity. You state you have to “prove affordability”. My reading finds that DF has the same affordability test requirement for all classes of lender, 1 per year, 1-3 and above 3, just that required use of LMLO is for what combo: 1-3 and high cost, which is my understanding. Where in 1-2 and qualifying mortgage (QM) you still have to prove affordability but you aren’t required to use a LMLO. I think this is double talk. Why not just use a LMLO all the time is my view as an investor who does and will do owner financed loans DF compliantly. And a servicer and keep one’s life simple. A servicer just makes sense today, as does using a LMLO. But 3rd party appraisal?
    My view is that few if any investor originated loans will be QM because we have to get higher interest rates than 1.5pts over floating prime or want balloons. I charge 9.5% the highest one can given 6.5% over prime. I realize that loan expense ratio, pts up front also affect the interest rate calc…
    My reading also suspects, but it’s not clear, that loans CAN be over 6.5pts over floating prime BUT there’s some additional affordability requirements or a 3rd party appraisal required. IE the list of requirments at each lender volume level AND QM or non-QM or over 6.5pts is not clear in anyone’s synopsis of DF yet.
    Again, my view of DF is that it’s not a single dimension (math term) set of requirements, it’s at least TWO dimensions: class of lender [1, 1-3, >3] VS [QM, high expense between 1.5pts and 6.5pts over prime, and >6.5pts over prime] varies your to do list, but not your basic affordability test requirements. DF I feel was right minded to have affordability at it’s core, but it sure is unclear what our minimum requirements are as the above 2 or more dimension matrix is not clearly spelled out in my view. This article just mentioned one dimension of the 2 or 3 that I feel exist. 🙂

  8. Hi Ken,

    Great Topic!

    So, does this have any effect on Lease Option Agreements? If they are still renting it until the day of closing, then it remains rental and not a sale. Unless the Agreement conveys consideration including interest rate or term length, it is not a sale. So does this still apply? If I am using this type of exit, I only do it in a Lease Option which my Lawyer and I worked out.

    But I am curious, How are they going to enforce these rules? As a lot of CFD’s never get recorded, how do they discover the seller financing? and what are the consequences? (Not that I am going to undermind them, just want to know more.)

  9. I understand the law to mean in regards to Seller carryback financing for an owner occupied property that there are NO BALLOON payments what so ever at any interest rate.

    So even with Seller carryback financiing if it is a 5 year loan it has to be fully amortized for 5 years. You can’t have a 30 year amortization with a 5 year call regardless of the interest rate. That is my understanding.

    Am I correct?

  10. I owner finance lots ( no home on lot) and I’m licensed as a RMLO and Mortage service co. Does dodd frank apply even though there is no home on the property ? And what is my max interest i can charge above apor ?

  11. I have an investment property under an entity. This entity has never done owner financing. I do not do much, but this is 1st after Jan 10, 2014 and have no plan to do another owner financing anytime soon (definitely not within 12 mo). I did owner finance one Oct 2013, but under my own name, not under the entity. Looks I fall under bucket 1 above, can someone point me to CFR where I can find this? Thanks!

  12. Would item #1 (Individuals/Trusts) apply to Land Trusts or just Revocable or Irrevocable Trusts? If it does apply to Land Trusts, it would seem that putting each property into a different Land Trust would satisfy the requirement. If so, would a different Trustee be required on each Land Trust, or would the Trustee be considered as the “individual” and still be subject to the One per year rule?


  13. travis schirato on

    I have only sold 1 home. it was with seller financing

    I have a home I recently sold in my corporation’s name and hold the note on.
    In October of 2013 I entered into a purchase agreement to sell the home for $2,300,000.
    The buyer was to put 300,000 down and pay 8% interest only with a 5 year balloon with no prepayment penalty.
    We were to close the deal January 14th 2014. In which case, I did not close the deal. The buyer, in turn, filed a lawsuit against me so I settled with them and closed the loan in accordance to the purchase agreement dated in October of 2013.

  14. Bill Gulley

    Well, I admit, basically the bucket list i fine, but comments in finance from a non-financial compliance source buck the system, it’s not just Dodd-Frank, it’s the SAFE Act, CFBP, ALTA, IRS, UCC, FTC and finance regulations that must be viewed together rather than selecting exemptions from one regulatory aspect.

    The “Ability To Pay” rules are set out in Dodd-Frank, however predatory lending laws use the same guidelines to assess a borrower’s ability to pay, you may be exempt from Dodd-Frank, you’re not exempt from predatory lending practices.

    Predatory lending includes placing a borrower in a position at a disadvantage, they can’t afford your deal, they can’t refinance the deal as required, the refinancing is difficult or impossible to perform because of the remaining loan amount being below minimum mortgage limits, property values were less than the loan amount without a sufficient pay down of principal as well as other issues.

    While we usually think of “ability to pay” with the payment obligation and debt ratios, it also includes the ability to pay the entire debt as agreed.

    I totally disagree with certain guru types that advocate some system of avoiding the Dodd-Frank Act, perhaps they failed to read the part that basically says that “any system, method or means used to circumvent the Act shall be subject to the intentions and requirements of the Act” paraphrased. In other words, you can’t dream up a convoluted system for the purpose of avoiding the intentions setting out underwriting and loan requirements. Setting up shell entities or multiple entities with the same principals behind the door isn’t going to cut it. Who benefits from that transaction, how often do they employ this strategy, what is the impact to the consumer are questions to address, it’s not just the name of your mom’s LLC!

    Predatory lending applies to all lending activities, auto financing, charge cards, student loans, commercial loans as well as consumer mortgages. Allowing or placing another party at a gross disadvantage is predatory dealing.

    Agencies work in concert, not alone, if the IRS concludes your deal is an installment contract, then the CFPB or any other agency may use that determination for compliance within their regulatory framework. What you call your convoluted financing arrangement is totally irrelevant, it is based more on the outcome designed, if that is conveying title upon some final payment, it doesn’t much matter what you call it, it’s a financing arrangement.

    If a city police officer is outside his jurisdiction and tells you to drive 90 miles an hour and the state trooper gives you a tick or arrests you, are you responsible? Yes, you are. So, when some RMLO acts outside his area of expertise and you follow that instruction, who is responsible? You are as the lender, so don’t be relying on hotshot RMLOs who have only a basic idea of loan origination. Those doing seller financed transactions are most likely not in compliance at the brokerage or administrative level (and they may not have a clue!)

    And, there are different rules for mobile homes, new construction, homes that have had improvements made, those in the business of real estate and land development, so there is no one size fits all dealings.

    There is also an issue with the valuation of a seller financed note, should a note holder need to sell it, you need to prove that it was in compliance when there is no RMLO seal on the note, so, how do you cover that aspect to protect your assets?

    A good friend of the family owns several radio stations, guess I should get on the air to establish my credibility, LOL. Get with a finance attorney, not a real estate attorney if you’re going to be in the finance business. Good luck 🙂

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