After the 2008 financial crisis, the Dodd-Frank Act was passed in order to prevent future financial crises by further regulating the financial industry. Part of the regulations are for people and companies who provide credit to individuals which is secured by a residential home. This includes both mortgages and seller financing AKA contract for deeds. There are exceptions so that owners selling their homes on contracts for deeds do not need to abide by the onerous regulations. How do you qualify for these exceptions?
First, there are some exception requirements differences depending on whether the seller is an individual, estate, trust, or entity. For sellers who are individuals, estates, or trusts, you may only sell one property every 12 months on a contract for deed. The repayment schedule also cannot result in negative amortization which means the monthly interest cannot be higher than the monthly payments due under the contract.
For sellers who are entities, you may only sell three property every 12 months on a contract for deed. The financing also must be fully amortizing, meaning it cannot have negative amortization as described above and you cannot have balloon payments.
Sellers who are entities also must determine whether the purchaser has a reasonable ability to repay. Another statute in the Dodd-Frank Act provides some guidance on how the seller determines this. The seller should review and consider the purchasers: credit history, current income, expected income that the purchaser is reasonably assured to receive, their current debt obligations, their debt to income ratio, how much residual income the purchase will have after paying their other debt obligations and the contract for deed monthly payments, their employment status, and what other financial resources the purchaser has.
Regardless of type of seller, the seller is not allowed to have constructed or acted as contractor for the construction of the property in their ordinary course of business. Sellers involved in the construction industry need to very cautious when considering selling their property on a contract for deed. The contract for deed must also have a fixed rate or an adjustable rate which is adjustable after 5 years or more, and that there are reasonable annual and lifetime limits on interest rate increases.
Complying with these regulations is an important step for your seller financing as there can be stiff financial penalties under the Dodd-Frank Act for non-compliance. Contact a Goosmann Law attorney at their Sioux Falls, Sioux City, or Omaha office today with questions regarding these regulations.