Now that more of the rules of this Act have taken effect (January 10th, 2014 was the magic day), we all have questions about seller financing. Aside from the draconian rules implemented to damage the weak housing market further (see previous post) , some rules went into effect regarding seller financing of residential properties.
I wrote an offer yesterday that contained seller financing. As I wrote it, I had to look up the law and make sure the seller was not in violation of any of them. Did I do it right? I have no idea. And I don’t thing anyone can tell me, at least not yet. So in summary, this is what I think it looks like (please correct me if you have better info!)
First, there are two sorts of seller financing. There is the one you can do one time a year, and the one you can do three times a year. For three times a year, the seller must own the property and the seller can pretty much be any entity (Person, Trust, LLC, Partnership, etc). For this type of seller financing, the loan cannot be a “high cost” loan, and other restrictions apply, relating to amortization, balloons, prepayment penalties, and loan costs. The seller must make an effort to determine the ability of the buyer to repay the loan, although they don’t have to keep records of this (which just seems … stupid). So what is a high cost loan? One that exceeds the Average Prime Offer Rate by more than 6.5%. How do you figure that out? This nifty calculator purports to do it: http://www.ffiec.gov/ratespread/newcalc.aspx
OK well that is not the whole story. See, it is 6.5% for a 1st lien and it is 8% for a 2nd. So… if I want to make an expensive loan, why not loan $1000 at 10% (say) and the remaining balance as a second for 11.5% ? Then it is not a “high cost” mortgage. I have no idea if this would work, and we probably won’t know until there is a legal case settling the matter.
Now if you want to make a high cost loan, you can make one per year, provided the seller owns the property, the property is the security for the loan, and the seller is either a person or a trust (no entities). Again, these rules are for residential properties which are deemed to be owner-occupied as a primary residence. These rules don’t apply to vacation homes, second homes, etc.
In short, be VERY careful doing seller financing. The good news (at least by my reading) is that hard money loans may still be possible for non-primary residence flips. But who knows?