In January 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank bill, became effective. The bill was passed in order to make improvements to the financial industry in light of the most recent housing and financial recession. It changes mortgage lending practices, including seller-financing, in such a way that borrowers have more protection.
The new law is applicable only to residential and owner-occupied homes. If you sell to other investors, or sell commercial property, then the new law does not apply to you. There are differences between the way in which the Dodd-Frank bill treats individuals, trusts, or estates that sell to one owner-occupant buyer in one year and those that sell to more than one purchaser in a year.
Where the seller finances one property in one year to an owner-occupant, the balloon payments are permitted, and you do not have to prove your ability to pay. Additionally, the note is required to be fixed for the first 5 years, after which time it may adjust at a maximum of 2 points per year with a cap that does not exceed 6 points higher than the original rate, which is required to be based on prime or an index, an example of which is a T-bill.
If the seller is an individual, trust, or estate that sells to more than more than one owner-occupant buyer in a year, but no greater than 3, then no balloon payments are permitted, and you are required to discover and provide proof of the buyer’s ability to pay. You are also permitted to perform up to three transactions without functioning as a mortgage loan originator, which is the equivalent of a licensed loan officer. And, as previously mentioned, the note is required to be fixed for the first 5 years, after which time it may adjust at a maximum of 2 points per year with a cap that does not exceed 6 points higher than the original rate.
If the seller sells to more than three buyers in a year, then either the seller is required to act as a mortgage loan originator or a mortgage loan originator must be employed to carry out all transactions. The rules for such sellers are the same as those for sellers who sell to more than one owner-occupant buyer per year.
Commercial, multi-family properties with 5 or more units are unaffected by the bill, as are vacant lots or land, even in the event that the buyer plans to reside in it.
If you would like more detailed information on the ways in which the Dodd-Frank bill affects you as an investor, you should contact a business lawyer.
Last Modified: 07-09-2014 12:42 PM PDTLaw Library Disclaimer
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