seller financing to home occupant - Dodd-Frank
Flipper · Wooster, OH · Member since 2012 · 139 posts · 30 votes
Good afternoon,
I've been reading a lot on this site and elsewhere about Owner/Seller financing as it pertains to Dodd-Frank, but I can't seem to find an answer for this situation (either that or don't want to believe the answer). Scenario:
I would love to loan them the money but I only want to lend my money for 5 years. The perfect scenario would be to offer them a 30 year term so their monthly payment isn't so high that they can't offered it. That said, Dodd-Frank and the "no balloon" clause is causing some concern. Did I understand the regulation correctly? A Seller that finances the purchase of one of their rental properties to a buyer occupant can't require a full payment in 3, 5, 7 yrs?
Does anyone know how I can make both myself and the tenant happy here?
Any input would be greatly appreciated.
Raul.
Ugh......
So much misunderstanding in these rules still.
First understand what DF did. It did not bar certain loan characteristics in absolution. It says that if you as a creditor wish to have a "Safe Haven" then you must follow these rules. So then we must ask, what is the Safe Haven. It essentially provides protection for a lender from a borrower who says "They gave me this loan and I could not afford it." So a QM Loan ("Qualified Mortgage Rule") means it is loan which the lender qualifies for the safe haven which means a borrower may not defend themselves with the idea that they could not afford the loan.
Balloons apply to this idea unless you are in a rural part of the country. You can create a balloon payment, you just do not get to rely on the safe haven unless you are a rural lender. You must prove that the borrower indeed has the ability to repay. For instance, you make a balloon note to a buyer who has $1 Million in the bank in cash. Logic would dictate if you prove the borrower has the cash and unobstructed access to it, he should be able to agree to a balloon and repay it in a year or three if the balance is less than that million. Perhaps this same example can be used in creating a balloon for a 1031 exchange or other asset liquidation that may provide a windfall for the borrower. In the event a default happens and you move to foreclose AND the borrower defends themselves with the idea "I couldn't afford the loan" you will have to prove your underwriting that they could. You do not have a safe haven which prevents the borrower from bringing the claim because it is a balloon.
OK. Now, the next thing that seems to be overlooked often is addressing one characteristic doesn't mean you addressed all the others. Not only do balloons disqualify a loan from the QM Rule but so does interest rates above the Average Prime Offer Rate on the date of origination. So to be clear, you can make a 30 year loan, with no balloon, which may qualify as a QM loan but as soon as you post an interest rate above the APOR the loan no longer qualifies for a safe haven. The rate as of today is around 4.0% and change. Most private finance deals have higher rates than that so automatically by the rate they do not qualify as a QM Loan. You WILL have to prove you underwrote the borrower if they bring a claim they can't afford the loan. They are not barred from raising the defense that they could not afford the loan.
As far as the OP's situation. We have 3.5 years of rental payments. So provided the loan payments align with the rental payments it seems we have some history to underwrite to. Next, if you want a balloon in 3 years or 5 years you need to be solving the balloon's affordability situation for the borrower. Probably means interest only is a no-go. If they don't have good credit today, how will they have it 36 or 60 months from now?
If the balloon comes and the borrower can't pay off the loan what will be your backup plan?
See what we are doing here....making responsible and mature lending decisions. That's the point of the rules. Don't try to make these other silly exotic plans. Address the real issue - "Affordability".
See this Dodd Frank Summary
Think of a 30 year lease but 12 months each with extensions. See due on sale clause exemptions.
Good afternoon,
I've been reading a lot on this site and elsewhere about Owner/Seller financing as it pertains to Dodd-Frank, but I can't seem to find an answer for this situation (either that or don't want to believe the answer). Scenario:
I would love to loan them the money but I only want to lend my money for 5 years. The perfect scenario would be to offer them a 30 year term so their monthly payment isn't so high that they can't offered it. That said, Dodd-Frank and the "no balloon" clause is causing some concern. Did I understand the regulation correctly? A Seller that finances the purchase of one of their rental properties to a buyer occupant can't require a full payment in 3, 5, 7 yrs?
Does anyone know how I can make both myself and the tenant happy here?
Any input would be greatly appreciated.
Raul.
How about put in LLC and sell Option on LLC?
You can only do what you can only do. You own it free and clear so ask yourself how much do you want your money to earn for you. If you could offer them a 30 year mortgage you feel their payment might be less than they are paying you in rent now? Am I understanding this right?
The lease option sounds like it might work. You can make part of the payment applicable toward a down payment so you are helping them save up money. What circumstances in their life would lead to them possibly qualifying for a loan on their own in 5 years? If there is a real possibility of them qualifying within that time then they will be able to buy the house from you through conventional financing of some kind and you will have all of your money back. I would think you are just one great guy. In this way you would have done what you could to help them buy the house but also maintained the house in your ownership and you will be free to sell it on the market 5 years from now should they fail to buy it on their own. Like I said you can only do so much.
Sounds to me like you intend to sell the house in 5 years anyway, right? Do they currently have any down payment they could give you for the lease option? or do you simply want them to keep on paying rental payments. A lease option at least might assure a little better their commitment to buy the house especially if they make some kind of a down payment now.
Two other questions come to mind.
1) What about 5 years of appreciation? Are you willing to give that up
and 2) Would the house you would be selling in the condition it will be in at the time of sale qualify for a conventional loan and if there might be improvements you will need to make and pay for?
Ugh......
So much misunderstanding in these rules still.
First understand what DF did. It did not bar certain loan characteristics in absolution. It says that if you as a creditor wish to have a "Safe Haven" then you must follow these rules. So then we must ask, what is the Safe Haven. It essentially provides protection for a lender from a borrower who says "They gave me this loan and I could not afford it." So a QM Loan ("Qualified Mortgage Rule") means it is loan which the lender qualifies for the safe haven which means a borrower may not defend themselves with the idea that they could not afford the loan.
Balloons apply to this idea unless you are in a rural part of the country. You can create a balloon payment, you just do not get to rely on the safe haven unless you are a rural lender. You must prove that the borrower indeed has the ability to repay. For instance, you make a balloon note to a buyer who has $1 Million in the bank in cash. Logic would dictate if you prove the borrower has the cash and unobstructed access to it, he should be able to agree to a balloon and repay it in a year or three if the balance is less than that million. Perhaps this same example can be used in creating a balloon for a 1031 exchange or other asset liquidation that may provide a windfall for the borrower. In the event a default happens and you move to foreclose AND the borrower defends themselves with the idea "I couldn't afford the loan" you will have to prove your underwriting that they could. You do not have a safe haven which prevents the borrower from bringing the claim because it is a balloon.
OK. Now, the next thing that seems to be overlooked often is addressing one characteristic doesn't mean you addressed all the others. Not only do balloons disqualify a loan from the QM Rule but so does interest rates above the Average Prime Offer Rate on the date of origination. So to be clear, you can make a 30 year loan, with no balloon, which may qualify as a QM loan but as soon as you post an interest rate above the APOR the loan no longer qualifies for a safe haven. The rate as of today is around 4.0% and change. Most private finance deals have higher rates than that so automatically by the rate they do not qualify as a QM Loan. You WILL have to prove you underwrote the borrower if they bring a claim they can't afford the loan. They are not barred from raising the defense that they could not afford the loan.
As far as the OP's situation. We have 3.5 years of rental payments. So provided the loan payments align with the rental payments it seems we have some history to underwrite to. Next, if you want a balloon in 3 years or 5 years you need to be solving the balloon's affordability situation for the borrower. Probably means interest only is a no-go. If they don't have good credit today, how will they have it 36 or 60 months from now?
If the balloon comes and the borrower can't pay off the loan what will be your backup plan?
See what we are doing here....making responsible and mature lending decisions. That's the point of the rules. Don't try to make these other silly exotic plans. Address the real issue - "Affordability".
Thank you Sir. What a great explanation!
Hi,
Every one is wrong! The rules are on the CFPB website consumer finance.gov
page 26 section 3.4
You can hire a MLO that knows what he's doing to write a balloon and do a loan up to prime plus 6.5%
http://files.consumerfinance.gov/f/201503_cfpb_201…
Terry Lewis
Thanks @Terry Lewis
I'm not a lawyer, nor do I pretend to be one. But here's the text copied from the file pointed to by Terry.
Hi,
Every one is wrong! The rules are on the CFPB website consumer finance.gov
page 26 section 3.4
You can hire a MLO that knows what he's doing to write a balloon and do a loan up to prime plus 6.5%
http://files.consumerfinance.gov/f/201503_cfpb_201…
Terry Lewis
Terry no offense but we need to do a better job of reading both the thread and the rule guidance publication. In the thread we are discussing the guidance around creating balloon notes which is guided by the Ability to Repay rule and the Qualified Mortgage rule.
In the publication you have linked it is talking about RMLO commission structures. A topic that was not evenly remotely broached here. While the ideas coincide within the Dodd Frank rules, the QM and ATR contain the actual qualifying definitions we are addressing here.
Further, no where in the rules does it mention that a rate of interest can be average prime plus 6.5%. In fact the two rules that apply, subject to state usury, are for 1.5% (covered or QM loan) and 3.5% (not covered or non QM loan) - which exceeding those thresholds results in defined as "High Priced Transaction" - used to be known as "Section 32 Loan" and requires additional disclosure and right of rescission. So to clear that up from confusion, a loan is "covered" or qualifies as QM if it is less than average prime rate plus 1.5%. Above that the loan is no longer a QM loan. Then that loan is consider a 'normal' (for no better word) until it exceeds average prime plus 3.5% at which time it becomes considered a 'High Priced Transaction'. HPT are subject more rules.
I will note, the implementation tip on the side which talks about 2% and 6% is talking about conditions of an Adjustable Rate Mortgage. Specifically the life time cap to a 'rate increase' should be limited to 6% or less and the annual cap to the rate increase should be limited to 2% or less. Fairly standard caps already in institutional ARMs. (also why it is aligned to the right of that section) Either way, that page does not really address anything in the OP's question nor the rules that apply here.
The referenced page you tout as the evidence of "Every one is wrong!" is describing specifically the definition of inclusion and exclusion of a Seller Financier where they are considered a creditor under Regulation X and Z. Or for those following at home TILA (Truth In Lending Act) and RESPA (Real Estate Settlement Procedures Act). However they are not considered an originator for rules of compensation.
The rules for originators is important as it limited the compensation to an originator from a lender for selling a higher rate. The infamous "YSP" or Yield Spread Premium. In a nutshell the RMLO use to be able to take a rate of 5% and receive 1% or the loan amount as compensation from the lender or they could sell 6% and receive 2% as payment compensation from the lender. (simplified for example purposes) Since the Seller Financier owns the property and they stand benefit from the sale and interest paid they are not included in the RMLO compensation discussion even though for all intents and purposes certain portions of the rules treat the Seller Financier as an originator.
Hi Dion,
Forgive me for not being clear or concise. The rules are in the CFPB website and they are straight from the horses mouth so to speak. Rather than try to rewrite the regulation it is better to refer to the actual site.
Raul's question was "That said, Dodd-Frank and the "no balloon" clause is causing some concern. Did I understand the regulation correctly? A Seller that finances the purchase of one of their rental properties to a buyer occupant can't require a full payment in 3, 5, 7 yrs?"
The answer is yes he can if he hires a Mortgage loan originator to bless/underwrite the loan and sign off on it. That puts the responsibility for the ATR, the balloon, and the high cost loan on the MLO.
The information on interest rates and high costs loans is good and found in the HOEPA final rule. I didn't read it as a question Mr. Pedrozo had. Hopefully I am helping here.
Terry
Hi Dion,
Forgive me for not being clear or concise. The rules are in the CFPB website and they are straight from the horses mouth so to speak. Rather than try to rewrite the regulation it is better to refer to the actual site.
@Terry Lewis
Raul's question was "That said, Dodd-Frank and the "no balloon" clause is causing some concern. Did I understand the regulation correctly? A Seller that finances the purchase of one of their rental properties to a buyer occupant can't require a full payment in 3, 5, 7 yrs?"
The answer is yes he can if he hires a Mortgage loan originator to bless/underwrite the loan and sign off on it. That puts the responsibility for the ATR, the balloon, and the high cost loan on the MLO.
The information on interest rates and high costs loans is good and found in the HOEPA final rule. I didn't read it as a question Mr. Pedrozo had. Hopefully I am helping here.
Terry
Terry, yes you are helping.
Maybe my original question was hard to understand. I basically want to finance the sale of the house to my tenant, but I want my money paid back to me at the 5 year point... therefore I want to know how I can draft the mortgage/deed to do say that.
Raul.
@Dion
Dion, I appreciate the education on how DF and Safe Haven are intertwined.
Do you agree that a RMLO can help me draft a mortgage/deed that will do what I need it to do? I basically want to finance the sale of the house to my tenant, but I want my money paid back to me at the 5 year point.
Raul.
Good afternoon,
I've been reading a lot on this site and elsewhere about Owner/Seller financing as it pertains to Dodd-Frank, but I can't seem to find an answer for this situation (either that or don't want to believe the answer). Scenario:
I would love to loan them the money but I only want to lend my money for 5 years. The perfect scenario would be to offer them a 30 year term so their monthly payment isn't so high that they can't offered it. That said, Dodd-Frank and the "no balloon" clause is causing some concern. Did I understand the regulation correctly? A Seller that finances the purchase of one of their rental properties to a buyer occupant can't require a full payment in 3, 5, 7 yrs?
Does anyone know how I can make both myself and the tenant happy here?
Any input would be greatly appreciated.
Raul.
You understood correctly it appears, no balloon payment until at least half of the original principal has been reduced through it's amortization.
My question, if that tenant can't qualify for a mortgage, what makes you think they have the ability to pay your loan with a balloon payment? How would they meet that obligation? What pathway do they have to cure their inability to obtain a mortgage?
IMO, any long term arrangement that ultimately causes title to be transferred will be a disguised sale and financing arrangement, call it what you will, if it walks like a duck, quacks like a duck and in the end you have roast duck on the menu, it's a duck!
You could finance the sale, but you can't take a security interest in the property which is what makes it a mortgage and consumer financing. If they fail to pay as agreed and the property reverts back to you, it's a secured financing arrangement covered by the Act. :)
Bill, It's unbelievable the mis-information that is being disseminated here. Where does it say anywhere in Dodd Frank that there is no balloon until half the mortgage is paid down? Half the country can't qualify for a mortgage right now under the strict guidelines of the lenders. It's because banks now get their spread off the discount window of the fed and buy treasuries with it at no risk, the securitization market is gone except Fannie, Freddie, and banks need to reserve a percentage of the non conforming loans the originate among other reasons. This is all another conversation.
What DFA says is that a homeowner, not a builder or dealer can sell one house per 12 months forward or backward pretty much as they wish. Yes even with a balloon. After one home sale up to 3 per 12 months there are restrictions full amortization and no balloons. A homeowner can hire a MLO to sign off on the loan if the MLO follows the rules of the DFA all spelled out in the consumerfinance.gov web site. There can be a balloon, there can be an adjustable loan and there can be a prepayment penalty. The ATR is something that the MLO has to follow and is a significant part of the DFA. If there is a Balloon in 5 years the MLO must council the buyer that the loan has to be repaid or refinanced and have a reasonable assurance that the buyer has a plan to pay the balloon. This can be achieved thru credit repair, inheritance of assets, amortization, reverse mortgage, sale, or any other method the buyer is fit to accomplish. The way for the MLO to prove this is in the collateral file that is created on behalf of the lender seller. This collateral file is also gives the note or mortgage value so it may be sold or borrowed against. The DFA professionalizes seller financing brings it out of the closet as a valid sales technique for selling homes and creates uniform guidelines for us all to follow to protect everyone involved. My observation with just this thread is that there are about 8 different opinions and until people start reading the law that is at consumerfinance.gov in a series of the final rules this valid and excellent method of real estate will continue to be chaos.
Terry Lewis
The answer is simple and inexpensive. To comply with affordability go to www.screenthetenant.com and pay $50. They will provide a full Debt-to-income ratio analysis in writing along with a professional assessment as to how long it will take to have the credit in a position to qualify for a bank loan (if needed). They will also provide credit restoration / enhancement services which your tenant / buyer will pay for.
Don't try to work around compliance. Address affordability and credit worthiness by working with a professional who underdstands the laws. Their deliverable package satisfies the legal criteria and your creditbility is enhanced because your did what any investor with high integrity would do, which is set his tenant / buyer up for sucess!
What will prevent the tenant from qualifying for traditional financing?
It looks like the Ohio First time home-buyers program only requires a 640 credit score:
https://ohiohome.org/homebuyer/first_time.aspx
How would the payments on a 15 year loan compare to the current rent? Even if they started at 100% LTV(at a 4% interest rate) they would be close to 30% equity at 5 years and hopefully able to finance conventionally.
The question at hand: "Can a Seller financed loan have a balloon?"
The answer is YES. However, that loan will not be considered a Qualified Mortgage. Where a QM loan grants certain safe havens of defense to a Mortgagee that the Borrower could not afford the loan. The rule only deals with whether the loan is or is not considered a QM. Balloons can still be made. Further, having an RMLO does not change any of the above. An RMLO can not originate a balloon loan have it qualify as a QM loan either unless the loan is a rural loan and fits a couple other criteria. The OP's property is in Tampa so getting into that is moot. (already said all this but it seems to need to be repeated)
You can read in layman's terms the stance on balloons here: CFPB Balloon
Much like this idea of balloons is being misunderstood all over the place so is the utility of an RMLO. Having an RMLO originate the loan does not resolve much in this case but may provide some expertise. I say "may" as most RMLO's are not underwriters and I would consider them for that type of task. Now find an actual underwriter, who will have an RMLO license and you will be in much better shape.
@Paul Ritter
Screening a tenant and underwriting in accordance to the Ability To Pay rules under Dodd Frank are two different things. Nothing on that link's site suggest the have any clue of ART, QM Loan or Dodd Frank. Therefore it doesn't seem logical to assume they could help in compliance issues in any manner. Might be nice for landlords but not loans.
@Raul Pedrozo - As I mentioned above the notion of using RMLO's that gets tossed around in private loan discussions is overboard. I can speak from experience of having many Florida licensed brokers work for me - most do not have any qualification to do such work. That is what many do not seem to understand. The primary occupation path of a licensed mortgage broker is to get a job in a retail sales environment - bank, broker business or alike - and find borrowers to get loans for. Those LO's do not underwrite loans. They take application and submit for approval. They submit to an underwriter or to an automatic underwriting system. Some do not even process the loan documents after obtaining a signed application with the borrower. There is another person in the workflow who does that. With all of the new requirements that retail mortgage business's face, I just don't think RMLO's ever get a chance to develop the same type of skills as an underwriter all that often. The one or two RMLO's in various states I have seen attempt to solicit this type of business knew much, much less than what they thought - which I find more problematic and harmful to the property owner.
Also understand, the use of an RMLO does not remove the Seller from liability to a bad loan. So an RMLO can be used and they can do an improper job and the Seller Financier is still just as liable as they were. Further, in many states RMLO's do not carry bond or insurance for such improper practices. If the RMLO makes a bad loan, it is essentially the same as the Seller making a bad loan and grants certain specific defenses to the Borrower.
I think I would contact a real estate lawyer in Tampa first and discuss with them. At the vary least you will need them to provide the loan documents. You are simply asking for a balloon note secured by a standard mortgage. Be aware that you probably do not want to dilly dally on this as new rules for TILA-RESPA Integrated Disclosure Rule starts as of October 1, 2015 which will cause all sorts of additional documentation requirements to licensee's. I am not sure just yet how that rule will affect Seller originations.
Just because you can do it doesn't mean you should do it. Seller financing to an owner occupant is fraught with risk to the seller/lender. The potential penalties can be egregious.
I appreciate everyone's comments and insights, thank you very much.
Raul.
Accordingly, such seller financers are excluded from the definition of loan originators for purposes of the compensation provisions unless they use table funding. In addition, the rule contains two additional special exclusions from the compensation, steering, qualification, and identification provisions for certain seller financers.
That's copied from the CFPB originally noted by Terry.
"Originators, for THE PURPOSE OF COMPENSATION PROVISIONS, unless they are table funding. The OP is not table funding.
For the purpose of the loan compensation provisions, outlined in the preceding text, what originators may charge a borrower are excluded for seller financing......says nothing at all about NOT following QM rules
IF your seller financed loan is a QM, which it will not be simply by having a RMLO, you could do a balloon.
Why can't a RMLO comply, because an RMLO must be employed under the compensation rules of any lender, simply paying a RMLO a flat fee doesn't comply with the compensation rules, nor can an RMLO act as some free lancing underwriter, they need more than an RMLO license, they need to be a lender or brokerage as well.
Now, the trick is to find a mortgage brokerage or lender that can originate QM mortgages with an RMLO who can underwrite a seller financed note under the QM rules.......best of luck with that! Which is why I said you can't do a balloon, meaning ......in reality!
If you can find that registered lender who does QM loans, having an RMLO on staff, who will originate seller financed notes, please, please, please let me know, I can make them a fortune. But, don't jump in claiming an RMLO is all you need, or some RMLO is doing this because many, if not most, don't have a clue about compliance in what they try to do. We already had one of those guys here and he's gone.
Ability to pay is as Dion mentioned, and there is no RMLO out there, unless they are or were an underwriter or higher up the food chain that can give a qualified credit analysis of someone who can't qualify today doing so in 3 or 5 years. Such analysis is not part of the RMLO licensing requirement, it's not taught!
:)
sooo, what happens if you or your RLMO originate a non-qualified mortgage and your buyer stops paying and they say you didn't properly qualify them? The judge says 'congratulations defendant, the house is yours!'? Sorry, I've been reading thread after thread as most go over my head and I've yet to find one 'for dummies'. Thanks