What Are Dodd Frank and SAFE?
If you are looking online for information on Seller Financing (also known as Owner Financing) you will eventually find articles about Dodd Frank and SAFE. Due to some of the banking and mortgage regulation issues and crisis’s of the last 10yrs, congress passed two sets of similar laws around a number of banking and mortgage practices. They have similar scopes, and in some cases, they appear to contradict each other.
These legislation’s have placed restrictions on selling residential, single family properties with Seller Financing.
In general, if you are just planning on selling your personal home or buying a personal home, these restrictions do not apply to you. If at all, these restrictions will apply to the seller. However, as long as the home is sold with fair and equitable terms, Dodd Frank and SAFE won’t apply to the seller either.
Read on if you want to learn more and be sure you are exempt to any of the restrictions put in place by this legislation.
The SAFE Act
The first set of new regulations is The SAFE Act which stands for Secure and Fair Enforcement for Mortgages Act which was passed in 2008. Among other things, SAFE was designed to protect consumers from misleading mortgage brokers who got paid extra to sell risky mortgages with variable rates and large balloons. To do this, the legislation creates a comprehensive regime to register or license all residential mortgage loan originators in the United States. SAFE requires that anyone who is in the business of writing mortgage loans be licensed. While the legislation was designed to regulate people who do multiple loan origination’s, in some limited scenarios, it could also affect people who would sell their personal properties with seller/owner financed loans.
There are also exceptions that vary state to state! One state might require anyone who writes a loan, including an individual selling just one property to only those who write 5 or more loans a year to be licensed as “mortgage or loan originators.”
The second set of new regulation is the Dodd Frank Act that went into effect January 2014. The main purpose of Dodd Frank was bank and securities regulation to avoid a repeat of the housing crisis that began in 2008. It created the Consumer Financial Protection Bureau and other laws. In addition, Dodd-Frank also has regulations around owner financing (seller financing) which included restrictions on seller-financing in residential real estate transactions where the dwelling is secured by a mortgage, unless the seller is entitled to certain exclusions.
As an individual seller – meaning you intend to just sell your personal property, you are largely exempt from both Dodd Frank and SAFE. However, if you keep hearing about these laws in relation to Owner Financing, here is what you need to know!
SAFE ACT EXEMPTIONS
- SAFE does not apply if the seller finance transaction is to an investor and the loan is not for personal, family, or household use.
- SAFE does not apply to an owner who finances the sale of a dwelling (or a vacant lot intended for construction of a dwelling) if the owner does not make more than five such transactions within any twelve month period.
- In otherwords, if you are only financing the sale of 1 property a year, SAFE does not apply to you!
DODD FRANK EXEMPTIONS
- The loan originator rule will not apply to a residential transaction where a “natural person, estate or trust” provides seller financing for only one property in any 12-month period, subject to reasonable financing terms (see below).
- The Three Property Exception: the loan originator rule will not apply to a seller who is financing three properties or less in any 12-month period if certain financing terms are met and the seller is not a contractor or builder.
Common Ground between Dodd Frank and SAFE.
The following sellers are exempt under both laws:
- A natural person, estate, or trust who provides seller financing for only one property in any 12 month period.
- Any type of seller financing entity that finances the sales of three or fewer properties in any 12 month period.
If you are not eligible for the above exemptions, the bulk of the Dodd Frank and SAFE regulations will be in effect. Even if you DO qualify for the above exemptions, there are additional regulations. Specifically, under #1 for Dodd Frank, if a seller financer is a natural person, estate, or trust, you still must follow some specific guidelines around the financing terms:
Key Financing Terms In Order to Maintain The Sellers Exemptions:
- If using a variable rate, the annual rate increase must be 2 percentage points or less.
- There are limits on the increase in annual percentage rates over the life of the loan
- No negative amortization.
- Balloon mortgages are acceptable, however, a 5-year balloon period is strongly recommended.
- Fixed rate or ARMs must reset after 5 years or more, with reasonable lifetime limits.
Additional Requirement That Are Always In Place In Seller Financing:
The seller must “qualify” the buyer. You must believe the buyer has the ability to repay the loan.
Qualifying means that the seller must ensure that the buyer can actually make the loan payments. The seller would do that by reviewing income statements, credit reports, debt-to-income, etc… Debt-to-gross-income, cannot exceed 43 percent.
The seller can’t write a “high-cost” loan. The loan terms need to be fair and reasonable.
A “high-cost” loan is any loan with an interest rate that exceeds 6.5 percent above the “average prime offer rate,” the rate people with excellent credit would pay for a first mortgage. If the loan is for less than $50,000, the rate goes up to 8.5 percent above the “average prime offer rate,” similarly, for a second mortgage. For loans of less than” $20,000, the points and fees can’t exceed 8 percent of the loan or $1,000; for loans over $20,000, the points and fees can’t exceed 5 percent of the loan.
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. You cannot intentionally lie or deceive the buyer!
And there’s more! The new rules also ban:
- Fees for paying all or part of your loan early (refinancing a mortgage).
- Late fees larger than 4 percent of the regular payment.
- Most fees for getting a statement of how much is still owed on the mortgage (called a payoff statement).
- Limitations on fees for loan modifications, if someone has trouble and can’t pay the mortgage.
- Creditors or brokers from advising homeowners refinancing into high-cost mortgages not to make their payments on an existing loan.
Most of these laws apply only to when the seller is selling to residential owner-occupants. If the buyer is an investor, there are no restrictions. Similarly, if the property for sale is a commercial property or vacant land, the seller does not have to follow most of those rules.
No matter how you decide to sell, though, run everything by an attorney and/or title company who knows real estate law and both these laws.
Dodd Frank and SAFE look really complicated! The good news is that if you are just planning to sell your own home (or buy a home from the current homeowner) and you will not execute more than one Seller Finance sale per year, it places you firmly within the various exemptions of both Dodd Frank and SAFE as long as the seller provides reasonable terms and conditions for the loan and is completely honest and transparent in their dealings with the buyer.
We are not attorneys and nothing in this document should be construed as legal advice. If you have concerns, we recommend you consult with an experienced real estate attorney to ensure compliance with Dodd Frank and SAFE as there continue to be nuances state to state and the interpretation of the laws are continuously changing.
PLEASE DO NOT:
Rely on this document as your sole reference on this topic.
Rely on your real estate agent to give you legal advice regarding Dodd Frank and SAFE compliance.
Assume that Dodd Frank and SAFE or other pertinent laws have not been amended or updated since this or any other article was posted.
Think if you are a real estate agent arranging credit or setting up a loan you are exempt from the loan originator rule.
Want to Learn More?
Find our courses at WWW.SellerFinanceCenter.Com!Read More
Selling Your Home? Why Owner Financing vs. Renting is a Sound Financial Decision!
Selling your home with Owner Financing vs. Renting is a great way to create passive income without the hassles of being a landlord!
Have you ever considered renting your home instead of selling but did not like the idea of dealing with tenants or repairs? Are you currently a landlord but at the end of your rope managing your property or your tenants? If so, selling your property with Seller Financing is a unique way to use your home or investment property to create a steady income for you without all the headaches that can come with being a landlord!
Many non-professional landlords rent their previous home, or perhaps, 1-2 investment properties to make a little extra income. However, frequently, part-time landlords don’t always know exactly what they are getting into when they decide to take on the role of being a landlord and while they like the regular income, they quickly tire of some of the issues that you frequently see from tenants including repair requests, late or missed payments, broken leases and fixing up the property between tenants!
Today, I’d like to introduce the idea of owner financing vs. renting your property. Owner Financing (also known as Seller Financing) comes with many pros, as well as a few cons relative to renting…depending on your financial goals as well as your willingness to be a landlord for an extended period of time.
Let’s start with a simple comparison table.
Owner Financing vs. Renting
|Renting – You as a Landlord||Seller Financing – You as The Lender|
|Who owns the House?||YOU||Buyer/Borrower|
|Who pays Property Tax & Insurance?||YOU||Buyer/Borrower|
|How do you get paid?||Rent Payments||Mortgage Payments|
|Who pays for repairs?||YOU||Buyer/Borrower|
In both scenarios, you are getting monthly payments, however, there are many differences between your role as a landlord vs. your role as a lender. With these differences come a number of pros and cons!
Being a Landlord:
- Because you still own the home, if it increases in value due to market appreciation, YOU get to capture that value when you eventually sell the property!
- Principle Paydown (assumes a loan is in place)
- In addition to capturing appreciation, you also get to capture the increased equity in your home as your tenants effectively pay down the principle on your mortgage
- Ex. If you have a loan balance of $100K and you rent the property consistently for 10yrs. After those 10yrs, you may only have a $75K loan balance remaining – which means you have created $25K of value through the payoff of principle. All funded by your tenants rent payments!
- Cash Flow
- Typically, rental properties that have to carry regular mortgage payments cash flow between $100-$400 per month. If you don’t have any mortgage debt, then they can cash flow much better!
- Repairs & Maintenance
- As a landlord, you are responsible for repairs and upkeep on your property. This can mean calls in the middle of the night as well as expensive, unexpected major repairs like AC, Plumbing and roofs, as an example
- Increases in insurance and property taxes
- As the owner of the home, you are responsible for paying your local property taxes as well as home insurance. As these costs rise over time, the rent you charge may, or may not, be able to keep up, which could cut into your cash-flow over time.
- Tenant turn-over, make ready
- If you get a good long term tenant, renting can be a very profitable endeavor! However, if you end up with extended vacancies or if your tenants turn-over frequently, you may see your cash-flow and profits significantly diminished
- Evictions can be time-consuming and expensive
Being A Lender – Using Seller Financing
- Good to Great Cash Flow
- Seller Financing Cash Flow tends to be more predictable because buyers of seller financed homes are far more committed and long term so you avoid vacancies and make ready work between tenants
- You can often get higher net income using seller financing, especially if you’ve already paid of your original mortgage or you can negotiate a high-interest rate
- The cash flow is very predictable
- Very Low Maintenance
- No Repairs – You have no responsibility AT ALL for repairs or maintenance! Because you no longer own the house, the new owner is responsible for all repairs.
- Also, if you use loan servicing, you will have next to no maintenance with regards to collecting payments and ensuring all the important home expenses such as property taxes, insurance, HOA, etc…
- Large Down payment
- Typically a Seller Financing buyer will pay the seller – YOU – a large down payment as part of the sale. These down payments are far larger than a normal security deposit, typically $10K-$20K.
- Cash flow is immune to changes in property taxes and insurance because it is based entirely on the interest rate you are charging for the financing you have offered.
- As the house appreciates, this increased value goes to the owner. In a Seller Financing scenario, that means that the appreciation in value ultimately gets captured by the borrower.
- If, in some unlikely scenario that the borrower stops paying, you might need to both foreclose & then potentially evict the buyer which can be time consuming and expensive.
- The only consolation is that you the seller, if you do have to foreclose on the buyer, you get to keep their down payment and you can sell the house again to a new buyer and collect a new down payment.
- If, in some unlikely scenario that the borrower stops paying, you might need to both foreclose & then potentially evict the buyer which can be time consuming and expensive.
Rental properties can be a great business – giving landlords an opportunity to both collect regular income as well as benefit from long-term property appreciation. However, being a landlord is not for everyone. There are a hundred stories of “fatigued landlords” who are simply tired of the ongoing effort necessary to maintain their property, respond to repair requests and deal with difficult tenants.
If my “fatigued landlord” description sounds like you, then Seller Financing may be a great option for you! In short, you get your cash flow without all the headaches of being a landlord.
If Owner Financing vs. Renting sounds like an interesting option for you, come visit us at the Seller Finance Center to learn more!Read More
Selling your Home with Owner Financing is a great Passive Income Idea!
You can create Passive income just like a bank!
Banks make money by charging you interest for using the banks money. The interest the banks pay to depositors is far less than the interest they charge to borrowers. Did you know you can do the same thing if you sell your home with seller financing?
Offering Owner Financing when you sell your home is a great way to maximize your sales price and generate a stream of income from which you can help you create wealth over time!
How Does It Work?
When you sell your home or property with seller financing, it opens up new financial opportunities:
- You can often sell with a higher sales price as seller financed properties attract an additional pool of buyers who are more willing to pay a higher sales price
- You can generally charge a higher interest rate, generally above market rates
- In some cases you can actually make more passive income from the interest you charge than you would make from just selling your house to a traditional buyer.
- You can avoid some of the hassles of being a landlord
Watch our video to see how you can make money like a bank!Read More
Positioning Multiple Owner Financing Offers To Get Your Desired Financial Outcome!
One of the great things about owner financing (also called seller financing) is the flexibility and creativity that is available to both buyer and seller as they try to create a set of terms and conditions to purchase a home. You can make multiple owner financing offers to steer the buyer or seller towards your desired offer.
If the buyer is working with a traditional lender for a bank mortgage, their financing options are largely limited to whatever is on the lender’s menu and typically, buyers gravitate to a 30yr fixed mortgage. At the same time, all the seller can influence is the end sales price.
With Seller Financing there is a much higher degree of flexibility for buyer and seller to negotiate mutually agreeable terms:
- Sales Price
- Down Payment
- Loan Term
- Loan Type
- Amortization Period
- Interest Rate
As such, you can create multiple owner financing offers with different terms
Buyer and Seller Motivations
Owner Financing Buyers and Sellers are typically motivated by different things depending on their current financial situation or future housing and financial objectives:
Buyers tend to care primarily about:
- The size of the down payment
- The size of the monthly payment
- Will they be able to payoff their balloon Loan (if used)
- Sales price is usually towards the bottom of their list
Sellers tend to care primarily about:
- Sales Price
- Monthly Income
- Total Income over the life of the loan
At the Seller Finance Center, we teach a 3-offer approach to making Owner Financing Offers and positioning the offers in such a way to steer the buyer or seller to your desired outcome!
For a Buyer making offers to a Seller:
We generally recommend making 3 owner financing offers, each optimized around a specific financial value proposition for the seller with the rest of the terms optimized for the buyer:
- Offer 1: Full Price
- The Seller gets their full asking price!
- Offer 2: Quick Cash-Out
- The Seller gets a short loan term and/or a large down payment
- Offer 3: Maximum Income/Return
- The Seller gets the maximum income each month or over the loan period
Example: The Seller has their home listed for $150K
- Scenario 1: After 6mo, the home still has not sold and they have not been getting many offers. They are stuck on getting a specific sales price
- Seller Motivation: Get their desired sales price
- Scenario 2: The Seller is an empty nester or retiree looking for monthly income
- Seller Motivation: Maximize their income
The Buyer presents the multiple owner financing offers:
Full Price Offer: $150K sales price, $10K down, 6% interest, 10yr Balloon w/30yr Amortization
- This offer is designed to grab the attention of a seller stuck on their sales price. This offer is a lifeline for them!
- The buyer can then propose other terms (length of loan, interest rate, down payment) that are more favorable to the buyer.
- The seller will receive $839 a month for P&I which is about $228K in payments over the 10yr term
Cash Out Offer: $140K sales price, $20K down, 6% interest 5yr Balloon w/20yr Amortization
- This offer is designed for sellers who are a bit nervous about Seller Financing and is structured to give the seller a larger upfront down payment to increase their confidence and a relatively quick payoff
- The Seller will receive $989 a month for P&K which is about $178K in payments over the 10yr term
Maximum Income: $130K sales price, $10K down, 7% interest 30yr fixed
- This offer is designed for sellers who don’t need to cash-out now and want to maximize their income
- The Seller will receive $297K in payments over the 30yr term (As much as $800 a month in income!
Hopefully, you can see how buyers can structure different offers to appeal to different types of Sellers! You can also fine-tune your offers to steer the seller towards the specific offer you as the buyer wants to them to accept!
For a Seller making offers to a Buyer:
We recommend a similar 3 offer approach when a Seller is proposing terms to a buyer.
Offer 1: Low Down Payment:
- For buyers with limited cash reserves
Offer 2: Low Monthly Payment
- For buyers with more cash reserves but limited monthly income
Offer 3: Longer Loan Term
- For buyers unsure of how/when they will be able to refinance.
Same Example: The Seller has their home listed for $150K.
When engaging a buyer, the seller presents the following offers:
Low Down Payment: $150K sales price, $10K down, 7% interest, 10yr Balloon w/20yr Amortization
- This offer is designed to incent buyers with lower cash reserves
- The seller can propose terms such as (length of loan, higher interest rate, full sales price) that are more favorable to the buyer
- The Seller will receive about $223K in payments over the 10yr term with a monthly P&I payment of $1085.
Low Monthly Payment: $145K sales price, $25K down, 6% interest 5yr Balloon w/30yr Amortization
- This offer is designed to minimize the buyer’s monthly payment as much as possible by reducing principle and using 30yr amortization
- The seller can propose relatively high sales price and a larger down payment.
- In this scenario, I show a short 5yr term but the Seller also has the option to choose a longer term if they want to maximize their income.
- The Seller will receive about $180K in payments over the 5yr term with a relatively low monthly P&I payment $719 per month for principle and interest)
Longer Loan Term: $140K sales price, $10K down, 7% interest 30yr fixed
- This offer is designed for buyers who have solid income but limited ability to eventually refinance.
- This offer works best coming from Sellers who don’t need the money right away and they will have a lot of freedom to modify the other terms to be more favorable to them in order to maximize income.
- For the terms showed above, a Seller will receive about $321K in payments over the 30yr term, $865 per month in income.
One last, real life, example that shows this tactic. My wife and I actually live in a home we purchased with seller financing!
- The seller wanted $275K for a very beat-up old home that needed extensive remodeling. It was over-priced given the work required but we liked the neighborhood and thought it had potential. We were also a bit short of cash as we had a lot of active projects at the time. So, we decided to try making a seller financing offer.
- We made 3 offers similar to below:
- $275K $0 down. 5yr balloon (6%). Total Payments: $346K
- $255K $20K down. 5yr balloon(6%). Total Payments: $302K
- $235K All Cash Total Payments: $235K
We built the offers to incent the seller to go for the 100% seller financing option by highlighting the total payments made during life of the loan.
- This seller was stuck on their sales price AND we sweetened the offer by demonstrating he could also maximize his total ROI over the 5 years with the 0% down scenario.
We now live in that house and refinanced after about 2yrs but not having to pay cash or use a bank allowed us to move very quickly and have cash free to rehab the property to our liking.
Negotiating the terms for a seller financing home sale creates opportunities for both buyers and sellers to structure favorable terms.
If you have a clear head around what your financial objectives are and are also perceptive enough to understand what the other parties motivations are, you can develop a 3-offer proposal that can “steer” the buyer or seller to your desired offer.
Presenting multiple owner financing offers, structured to focus on the other parties hot-spots and steering them to the offer you like the best, can be a very effective strategy in seller financing negotiations.
We hope to see you at the Seller Finance Center soon!
— Jeff and LennaRead More
Should I buy a house?
There are many articles and opinions about whether a home should be considered an investment or an expense!
Both opinions are fair. I’ve certainly seen people buy houses that are beyond their means. These homes then become a money pit for the buyers.
On the other hand, I have also seen personal homes, bought with some planning and foresight, create significant equity for their owners!
Owner Financing is a great way to enjoy the benefits of home ownership if you can’t qualify for a bank mortgage.
Learn how home ownership can unlock the power of appreciation. Your personal home, bought correctly, can create significant long term wealth!Read More