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Seller Financing and Mortgage Loan Originators License: Part II

Posted by 15789465 on

I'm apparently still stirring up hornets' nests with my newsletter article stating that people who sell "dwellings" and hold some or all of the financing will need a mortgage loan originator's license unless they are selling their own personal residence. I feel very strongly about my opinion.  But, everything is just an opinion right now. No one except HUD knows for sure.Why does HUD matter? Because they are driving this bus. Here's an excerpt from their website:
  • The SAFE Act's licensing and registration standards for mortgage loan originators are minimum standards. (See section 1505(b).) Legislation enacted or regulations promulgated by a state may exceed the minimum standards of the SAFE Act. States may not, however, enact legislation, promulgate regulations, or otherwise impose requirements that would frustrate the objectives of the SAFE Act, keeping in mind that the SAFE Act's primary objectives include provision of a comprehensive licensing and supervisory system with uniform application and reporting requirements. (Reprinted from http://www.hud.gov/offices/hsg/ramh/safe/cmsl.cfm
The National Association of Realtors asked HUD to give an exemption for more than just seller financing of the seller's own personal residence. NAR asked HUD to extend the exemption to people who don't do this very often, maybe only 5 or 10 times a year.  HUD (or the Senate) listened, and the final legislation gave an exemption for people who seller finance only 5 times a year.  HERE is the NAR letter.  Unfortunately, Alabama's law was limited to seller's own personal residence.  As long as the Alabama law is more restrictive than the federal law, we have to use the Alabama law in Alabama. But all of that is just reading tea leaves right now. What REALLY matters as far as the mortgage loan originator's license goes is, what does the Alabama Banking Department think? They are going to be the ones enforcing this.  So, I've sent an email to them, asking two questions:
  1. Does seller financing require a license if the dwelling being sold is not the seller's personal residence?
  2. Will a bond for title or a contract for deed be considered a transaction covered by the S.A.F.E. Act?
As soon as I receive an answer, I will share it with everyone. With that being said, don't let that lull you into a false sense of complacency about other federal requirements. Truth in Lending is a big problem lurking out there for people who engage in seller financing of dwellings.  This is an area where you should not skimp on legal fees. Ask a lawyer for written advice, get a lawyer to do your documents for you, or hire a licensed and bonded mortgage loan originator for your paperwork.  As many lenders today are learning, sloppiness is okay as long as everyone is making money hand over fist and making payments on time. When the economy turns downward, though, all our past sins in documentation come back to bite us on the you-know-what.

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5 comments

  • Hi Philip, PA law is going to be different from Alabama law. I’d suggest contacting the state banking department for guidance. They will also have the lists of registered loan originators. You can contact them and get a sense of the fees. In Alabama, they start at around $300 for a small transaction.

    deniselevans on
  • Hi. My goal with retirement money is to buy older mobile homes with cash and make a profit selling them at a higher amount using seller financing (since most of those buyers can only buy this way).

    If I don’t wish to become a Loan Originator, how do I go about (I live in PA) finding someone to “represent” me? Of course, the amount I would be financing is not very high (from 5-10K), so how much might the fees be?

    When I Google this topic I get back very little.

    Thanks,

    Philip

    Philip Bourdon on
  • I hope they give you an answer soon. I’m considering owner financing the house my daughter just moved out of, which I own.
    Travis

    Travis Parker on
  • I don’t understand what you mean by “take control of my mortgage.”

    Are you asking if you can transfer your property to your relative, who will then make the payments, but the mortgage will stay in your name? If so, most residential mortgages have what is called a “due on sale” clause in them. It allows the lender to “call” the loan, and demand payment in full, when the property changes hands. The clause is designed to protect the lender in times of rapidly rising interest rates. If people could just sell their property, and let the buyer take over making the mortgage payments, then lenders would be stuck with lots of low interest rate loans. If buyers had to get new loans when they bought property, then the old low-interest loan would be paid off, and the buyer would have to get a new loan at current, higher, interest rates. Some other lender might get to make the new loan, but at least the old company won’t be stuck with the low interest rate loan for many, many, years.

    When you understand that, you understand that the due on sale clause is not automatic. In times like today, there is no reason for a lender to demand payment in full when a property changes hands. Interest rates are low, and stable. There is a high risk that an existing borrower might default if they weren’t able to do an arrangement such as you desire. So, a lender might allow the transaction, and give their written permission.

    You should contact your lender and ask for their permission. Worst case, perhaps they will allow you to add your relative to the deed, instead of completely transferring the property to him or her.

    You will read things on the Internet that tell you complicated ways to transfer property and keep the same mortgage. Every one of those I’ve read about depends on keeping it all secret from the lender, and then some convoluted explanation for why it is all okay. In my opinion, if success depends on keeping it secret, then it is NOT all okay.

    Ask for your lender’s permission. I think they might be very likely to give it to you.

    If I am correct about what you are trying to do, it is called a “wrap-around mortgage” if additional payments (over the original mortgage payment amount) are made to you. If you simply transfer it to someone and they take over the payments, it is called “selling subject to a mortgage.” Either way, you should talk to an accountant about how to structure the deal with your relative. There might be adverse tax consequences to you. They are too complicated to explain here, but you can probably find other explanations on the Internet by googling the terms above, plus “income taxes.”

    Remember, also, that if your relative is late in making the payments, or defaults, it will show up on YOUR credit report, not theirs. If something happened in their past to cause them to have bad credit today, will that same thing happen again, except it will cause you to have bad credit? You also need to protect yourself and make sure there is always adequate insurance on the property. If they fail to pay the insurance and it is cancelled, then there is a fire or something, it could all turn into a loan disaster very quickly. One way to protect yourself is to require you be named as an additional insured on the policy, and receive notices of default in making premium payments. That way, if there is a problem, you can make the premium payment yourself and then collect the money from your relative. BUT, you’ll need some sort of agreement that gives you the right to be reimbursed by them. You can see how it might be important to gain the assistance of an attorney, don’t you?

    Good luck, and let me know how it turns out, okay?

    Denise L. Evans on
  • I’ve got a relative that would like to take control of my mortgage but she cannot get accepted for a loan because she have a very low fico score. I want to help her out, that’s why I would like to determine whether it’s ok to change the title to her name and I remain on the mortgage. Could it work if we do that? Is there a best way for us?.

    site on

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