The latest effect of the Frank Dodd financial law is to throw a wrench in the works of seller financing. Specifically, the law says that any residential loan must meet certain criteria; they must be originated by a licensed person working at a licensed company, the borrower must be qualified as to their ability to repay, the loan must be at least 5 years and fully amortized, and there can be no balloon payment requirements.

For seller finaning, the requirement that the originator be licensed is waived, for up to a certain number of transactions per year. So a seller can still do seller financing, to a point. But the days of selling a property to someone who can’t qualify, at a high interest rate, are likely over. The requirement that the lender must document the borrower’s ability to pay puts a stop to that. The law requires looking at credit scores, debt to income ratios, and other factors.

What about hard money?

I spoke with several hard money lenders, and their attorneys, they claim, advised them that the law does not apply to property flips. I think this is true, because it looks like the law talks about “owner occupied” dwellings in all these requirements. Most property investors use hard money to hold and rehab the property, not move into it. So hard money is still alive. Even seller financing, as long as you are financing someone who is flipping and does not plan to live in the property, still works.

So I suppose overall,this part of the law is good and bad. No more taking advantage of people who can’t qualify; but then, people who have a foreclosure or short sale and can’t qualify may have a hard time even with seller financing, where in the past they might have been able to buy a home.