Seller Financing More Restrictive After January 10, 2014

Effective January 10, 2014, all seller financing must include the services of a licensed mortgage loan originator. The licensed originator can be the seller, or a 3rd party hired for that purpose.  The rules apply to regular sales and mortgages, plus bond for title, land sale contract, vendor’s lien deed, lease/options where part of the lease payment is credited to the purchase price, and similar transactions. All require licensing, unless you come under one of the “safe harbor” exceptions described below.

There are only two exceptions to the rule. One is called the Three-Property Exclusion, and the other is called the One-Property Exclusion.

The Three-Property Exclusion is available to individuals, partnerships, corporations, LLCs, estates, trusts, and similar entities. If the financed sale is a residence, then developers and contractors who built the residences being sold cannot take advantage of this exclusion. Sellers can finance up to three properties in any 12-month period. The financing must be fully amortizing, with no balloons or negative amortization. The interest rate must be fixed, or adjusted only after five years.  There are no requirements for how much to adjust, but the safest course is suggested to be annual caps of 2% and a lifetime cap of 6%. Also, the seller must determine in good faith the borrower can make the mortgage payments.

The One-Property Exclusion is available ONLY for individuals. It is like the Three-Property Exclusion, except that balloon mortgages are allowed, and the interest rate can adjust from the very beginning, without having to wait five years.

These rules take the place of the Alabama State Banking Department Interim Rule, and its Five Property Exclusion. After January 10, 2014, there will no longer be a Five Property Exclusion.

Be aware, also, that if you make 2 or 3 high-cost loans as described in the Homeownership and Equity Protection Act (HOEPA) you are considered a loan originator and cannot use the safe harbors described above, and are also subject to the Truth in Lending Act.   See more guidance on that issue HERE