If you’re in the real estate business and are familiar with owner financing, I’m sure you’ve heard the latest buzz going around about the Dodd Frank Act. The rule takes effect on January 10, 2014, but there are some very important provisions and exclusions that all real estate professionals must be aware of. Since there has been a lot of confusion regarding balloon payments and if they are allowed, the first exclusion we will talk about today is the single property exclusion which does NOT prohibit a balloon payment or an adjustable rate mortgage. Most sellers of owner financed homes in Austin and surrounding areas will fall under this exclusion.
Seller Financing – One Property Exclusion
This more flexible exception applies only to a more narrow definition of “persons” (only natural persons, estates, and trusts) that sell only 1 property in a 12-month period. The exclusion is not available to other organizations, such as corporations, partnerships, or proprietorships. To be exempt from the definition of loan originator using the 1-property exclusion, you must meet the following criteria:
- The person provides financing for the sale of only one property in any 12-month period. The property must be owned by the seller and serve as security for the financing.
- The person has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the person. (This is the same requirement as applies for the 3- property exclusion.)
- The person provides seller financing that meets the following requirements:
- The financing has a repayment schedule that does not result in negative amortization. [highlight type=”light”]A balloon mortgage is permitted.[/highlight] (NAR sought relief from the prohibition against balloon mortgages.)
- The financing has a fixed interest rate or an adjustable interest rate. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for US. Treasury securities or LIBOR. CFPB’s Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement as applies for the 3-property exclusion.)
Furthermore, there is a bill pending in the U.S. House of Representatives that would allow all seller finance transactions to include a balloon payment. The bill, HB 245 sponsored by David Schweibert, is currently in committee.
This information is not legal advice and is deemed reliable but not guaranteed.