Fewer restrictions on seller financing
Now that the dust has settled and the provisions under the Dodd Frank Act are clear, some sellers may benefit by carrying their own real estate financing. Gone are provisions that require a seller to use a licensed mortgage professional to handle paperwork. Gone too is a provision that would prohibit balloon payments for single unit residential sales.
When credit is tight the market may dictate seller financing as the only viable option for sellers to dispose of their unwanted real estate holdings. Even in a credit friendly market some, as an exit strategy, prefer to collect monthly payments for a period of time thereby minimizing their tax liability. Proposed regulations that restricted some seller activity have been removed as of Dodd Frank's implementation last month. One feature is the one property exclusion that allows a seller to finance one property per 12-month period. There are of course still restrictions. The property must be owned by the seller and serve as security for the financing. The seller may not have constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the person.
Under the new rules, sellers of single properties have the right to sell that property with a note while scheduling a balloon payment or a "balance due in full" clause at some future date. A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The National Association of Realtors was instrumental in removing the balloon payment restriction for a single sale.
The seller does not have to prove borrowers "ability to pay." The interest rate of the note must be based on an accepted index (LIBOR, T-bill, etc.) and must be fixed for the first five years of the loan. After five years, the rate can adjust up to two points per year to a maximum of six points above the original interest rate.
There is hope too, for sellers of multiple properties but the rules are different. When selling more than one property the notes cannot contain a balloon payment. This is less attractive for investors who don't want to hold a note over the entire amortization schedule, but could be acceptable for someone seeking residual income. The seller does have to prove borrowers "ability to pay." The interest rate guidelines are the same, except for the balloon payment.
If you are going to be involved in more than three transactions a year, the provisions under the act will still require you to use a Mortgage Loan professional to facilitate the process. So the real relief here is for the individual who privately, or through a trust, wants to sell just one property. Many in this position hope to maximize the selling price because they can make concessions for buyers who cannot qualify for a traditional mortgage either due to their lack of adequate down payment or marginal credit. Although a credit check is not mandatory under the one property rule, sellers would be wise to consider credit before entering into an agreement to finance their property.
Trust an expert...call a Realtor. Call your Realtor or visit www.cdarealtors.com to search properties on the Multiple Listing Service or to find a Realtor member who will represent your best interests.
Kim Cooper is a real estate broker and the spokesman for the Coeur d'Alene Association of Realtors. Kim and the association invite your feedback and input for this column. You may contact them by writing to the Coeur d'Alene Association of Realtors, 409 W. Neider, Coeur d'Alene, ID 83815 or by calling (208) 667-0664.