Seller Financing - Minimum terms?

[Michael White]

Are there any typical minimum terms that those providing seller finance impose on the buyer? Surely as the whole point of selling financing is to obtain a long term steady income, it wouldn't be in the interest of the seller to allow the buyer to rehab a property and sell it fairly quickly?

Input appreciate. Thanks

[Brian Gibbons]

I would contact a RMLO

Seller financing--one property exclusion

This more flexible exception applies only to a more narrow definition of persons (only natural persons, estates, and trusts), that sell only one property in a 12 month period. The exclusion is not available to other organizations, such as corporations, partnerships or proprietorships. To be exempt from the definition of loan originator using the one property exclusion, one must meet the following criteria:

A. The seller provides financing for the sale of only one property in any 12 month period. The property must be owned by the seller and serve as security for the financing.

B. The seller has not constructed or acted as construction contractor for a residence on the property in the ordinary course of business of the seller. (This same requirement is applies for the three property exclusion).

C. The seller provides seller financing that meets the following requirements:

C1. The financing has a repayment schedule that does not result in negative amortization. A balloon mortgage is permitted. (NAR sought relief from the prohibition against balloon mortgages.)

C2. The financing has a fixed interest rate or adjustable interest rate. It has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as in this is for U.S. Treasury securities or LIBOR. CFPB's official interpretations note that an annual rate increase of up to two percentage points is reasonable. A lifetime cap of six percentage points subject to a minimum floor and a maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement is applies for the three property exclusion.)

Seller financing--three property exclusion

This exclusion applies to persons as defined broadly under TILA to include not only natural persons but also a wide range of organizations as corporations, partnerships, proprietorships, estates, and trusts. To be excluded from the definition of loan originator using the three property exclusion, one must meet all the following criteria:

A. the seller provides financing for the sale of 2 to 3 consumer properties in any 12 month period. Each property must be owned by the seller and service security for the financing.

B. the seller has not constructed, acted as construction contractor for, a residence on the property in the ordinary course of business of the seller.

C. the seller provides seller financing that meet the following requirements:

C1. The financing is fully amortizing (no balloon mortgages or negative amortization.)

C2. The seller determines in good faith that the consumer or buyer has a reasonable ability to repay. The regulation does not require documentation of the determination, which significantly eases the regulatory burden, though CFPB points out that it may be a good idea in case questions arise whether the seller made the determination. CFPB's official interpretations of the regulation provide guidance on how a seller could make the determination that the buyer has a reasonable ability to repay. This could include considering earnings as evidenced by payroll or earning statements, W-2s, etc.; other income from a federal state or local agency providing benefits and entitlements; and or income earned from assets (such as financial assets or rental property). The value of the dwelling may not be considered as evidence of the buyer's ability to repay. The seller may rely on copies of his tax returns.

C3. The financing is a fixed interest rate or adjustable interest rate that is adjustable after five or more years. It has an adjustable interest rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices of U.S. Treasury securities or LIBOR. CFPB's official interpretations note that annual rate increase of up to two percentage points is reasonable. A lifetime cap of six percentage points, subject to a minimum floor and maximum ceiling, up to any applicable usury limit, is reasonable. These "safe harbors" are not mandatory, but sellers would be wise to adopt.

Obviously, the other third option to the above exemptions from the safe act is to engage an MLO to qualify the transaction. The MLO review is a safe harbor. If the seller\lender is assisted by an MLO engaged by the lender as a vendor or to assist in the loan in its underwriting, and alone does not seek these limited exemptions from the safe act but instead treats a transaction is a full-blown activity in the lender will either itself or through the brokerage of the MLO generate a loan in full compliance with RESPA, TILA, Cueva, Apple, HUD and jump through all the conventional private money financing and lending hurdles, the long-term amortization above does not apply, and the seller's\lender can provide for terms that are not inside the exemptions, such as balloon payments.

Note: if the sellers considered a creditor under TILA because the seller makes two or three high-cost loans under the home ownership and equity protection act (HO EP a), the sellers automatically considered to be a loan originator for purposes of the loan originator qualification requirements and 12 CFR section 1026.36(f) and (g) and any other rules applicable to creditors under TILA. This is true even if one is exempt from the definition of loan originator under the three property exclusion. Check with an expert to avoid providing seller financing subject to HOEPA, which imposes many more limits and requirements.

Other requirements apply even if seller is not classified as a loan originator

Even if the sellers excluded from the definition of loan originator, the seller is only exempt from the loan originator requirements of the regulation. In exempt person would still be subject to the rule prohibiting anyone from paying a loan originator compensation based on the terms of the transaction (e.g. higher payments for loans with higher interest rates). This would occur if the seller financier engages a loan originator to assist with setting up the financing for the seller finance. In addition, the limits on mandatory arbitration would also apply, i.e. the contract and other agreement for any credit transaction, including any seller financing, we not require arbitration or other non-judicial procedures to resolve disputes. After dispute arise however, the parties may agree use arbitration or other non-judicial procedure.

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