Many times a buyer doesn’t have the necessary capital, credit, or financing options to purchase a home. Seller or owner financing provides a solution for buyers who ordinarily wouldn’t be able to obtain conventional financing. However, in some situations seller financing makes the seller a lender. When this happens, it is not prohibited under the Dodd-Frank Act.
What is a mortgage originator?A mortgage originator, according to the Dodd-Frank Act, is “any person who for direct or indirect compensation or gain or in the expectation of direct or indirect compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”
According to the act, any person who negotiates terms of a residential mortgage loan is considered to be a “mortgage originator.” This means that the person must be a licensed mortgage broker and comply with all the applicable laws. However, the act also provides for several exceptions where certain sellers can provide owner financing without being a licensed broker.
When can a seller provide financing under the Dodd-frank act?
The mortgage originator law applies to those homeowners who are purchasing residential properties for residences. A residential property includes up to four units and applies to homes, condominiums, mobile homes, townhomes, apartments, and other similar related properties.
There are is a one property exception to the “mortgage originator” rule. This means that a seller who finances credit to a buyer, secured by a mortgage will not be considered a “loan originator” if:
An additional exception is the Three Property Exception. This is applicable when the seller can extend and will not be considered a “loan originator” when:
(a) they are a natural person, estate, trust or an entity;
(b) they provide financing for three properties or less in any twelve month period;
(c) they own the property securing the mortgage;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) the loan must be fully amortizing and there are no balloon payments or structures allowed;
(f) while the act does not prohibit adjustable rates, a fixed rate is suggested. In this context, limits and caps are required;
(g) the seller is required to make a reasonable investigation regarding the buyer’s ability to repay the loan. Although formal documentation is not required, the investigation should be done in good faith and the results should be maintained.