seller financing to home occupant - Dodd-Frank

[Raul Pedrozo]

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:

1. 1.  I have a rental in Tampa, it is owned free and clear the home is in the name of one of my LLC's. 
2. 2.  My current tenant has been in place and paying rent for 3 1/2 years and has requested to purchase the home.  
3. 3.  Tenant doesn't qualify for conventional lending, so they would like owner financing. 

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.  

[Dion DePaoli]

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".