Owner Financing at Risk

Real Estate View: Dodd-Frank Act puts owner financing at risk
Dolores DeMers/For the Sun-News
Posted: 10/24/2011 08:49:57 AM MDT


Dolores DeMers is the president of the Las Cruces Association of Realtors and works with RE/MAX
Editor's Note: This is another in a semi-regular column written by members of the Las Cruces Association of Realtors.

LAS CRUCES - Throughout the years owner financing has been a great vehicle for innumerable buyers who are capable of making regular payments on an amortized loan, but who don't qualify for traditional mortgage loan products. A typical real estate contract using owner financing requires proof of ability to perform, a substantial down payment, an agreement to the terms of the contract - contract amount, length of repayment period, interest etc.

The owner may either service the installment payments or have all payments handled through an escrow company. Owner financing has worked well for generations in this country, but now parts of the Dodd-Frank Act will severely restrict owner financing and will do harm to buyers and sellers.

Here are a few highlights:

The seller cannot be the builder of the home being financed. Why would the government want to restrict a builder from selling his own product on terms that are satisfactory to the buyer, particularly when the buyer is having a difficult time getting conventional financing? Would it be better for spec homes to go back to the bank?

The loan must amortize fully with no balloon mortgage allowed. Many sellers offering owner financing are older than 50. How many are going to outlive a 30-year note? With no short term balloon in place and because of the length of the note, the seller will have to steeply discount the note if he chooses to sell it to another party.
Buyer has three years to rescind the sale. The seller must document the buyer's ability to pay using underwriting requirements consistent with the Truth in Lending Act. If the seller makes even one small error, the buyer has up to three years to rescind the sale and demand back all the money that has been paid to the seller. This is regardless of the benefit the buyer has gotten from the use of the property during the time he had it. This is unacceptable; buyers should have some skin in the game. Sellers do not carry errors and omissions insurance and generally do not have the cash reserves in their business plan to sustain such a loss.

Only buyers who are already eligible for conventional financing will be able to use seller financing. The seller must determine in good faith the buyer's ability to repay the loan. Any buyer who is capable of passing the underwriting scrutiny of the Truth in Lending act doesn't need owner financing. The buyers who need the helping hand of owner financing won't be eligible.

Seller limited to three installment sales per year. A seller must become a licensed mortgage loan officer if more than three properties are sold in a year using owner financing. There are many citizens in New Mexico who helped the people in their communities get started on the path of home ownership through owner financing. They helped their buyers start building financial wealth and equity through their first real estate transaction. What difference does it make how many properties are offered as installment sales in a year as long as the seller has determined each buyer has a reasonable ability to repay the loan?

The Dodd-Frank Act treats owner financing as if it were predatory lending. It is not. Please contact your elected officials in Washington, D.C. to protect owner financing from these sweeping rule changes.


Dolores DeMers is the president of the Las Cruces Association of Realtors and works with Re/Max