We think about credit scores when getting a car loan, or getting a traditional mortgage for our home, but what about as an investor looking to qualify a potential home owner for your seller financed property sale? In short, you should always pull credit on potential applicants but you need to be aware of the Fair Credit Reporting Act as a decision maker in the approval or denial of a prospective borrower.
Here are a few considerations from the federal level that you need to be aware of to stay in compliance:
- Disclosed to the consumer that an investigative consumer report will be made by your inquiry. This disclosure should be in writing and mailed or delivered within 3 days of the request to pull credit. The consumer should also be made aware of additional rights that they have related to the credit inquiry including things like, the full scope of why the credit was pulled
- A printed copy of the credit report should be given to the consumer. In addition they have the right to get additional reports under the Fair Credit Reporting Act
- Compliance with RESPA and Truth and Lending guidelines including literature of home ownership financing
In addition to some of the guidelines mentioned above there could also be additional restrictions built into the terms of the sale that you can provide. Here are a few of the examples:
- A limitation to the dollar amount or percentage of the payment that can be charged on late fees
- Late fees that have given reasonable consideration to making a timely payment.
- Not prohibiting the purchaser from pledging the property as security against a future loan (HELOC)
- No pre-payment penalty
- Interest rates that exceed state mandated caps. For example in Indiana, a contract cannot be more than 6% above conventional financing for residential properties. Personal property (mobile homes) would not be restricted by this cap.
Now as you review the list above, there is applicability in all cases to the Fair Credit Reporting Act, but state specific jurisdictions are best investigated with an attorney before originating the seller financed sale. If you end up in court to foreclose on the purchaser, you want to make sure you have not violated any state or federal law so that your contract can be enforced and you can demand possession of the asset. A contract that fails to follow these guidelines is at risk on not being enforced in the courts leading to more legal and financial consequences. When it comes to offering seller financing, your best opportunity to protect yourself, is to do so before the transaction.
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