Lending Regulations Apply to 'Owner-Carry' Sales
Few investors realize that when they sell a property on an owner-carry basis, they may be acting as a "lender" within the law. Keep in mind that selling a property is an extension of credit. In addition to state consumer and lending laws, you may need to comply with Federal regulations.
The first law you need to become familiar with is "Truth-in-Lending." Truth in lending, also called "Regulation Z", applies to anyone who "regularly" extends credit. Litigation of this definition has come up with a liberal definition; if you are selling properties on an owner-carry basis more than a few times a year, you are lender within the statute.
Truth in lending applies to all consumer loans, not just home loans. Under the law, a lender must disclose certain financing terms, such as the Annual percentage rate, amount financed, total interest paid. A sample form with explanations can be found by clicking here.
If you extend credit exceeding $1,000,000 per year secured by real estate used for the borrower's residence, you must comply with the Real Estate Settlement Procedures Act ("RESPA"). RESPA is one of the most complicated and confusing Laws ever created, is constantly changing and few lenders are ever in strict Compliance with the law. Nevertheless, you should at least make an attempt at "core" compliance, which involves:
* Giving the borrower/buyer a "good faith estimate" of closing costs within 3 days of the accepting a loan application (or signing of a purchase contract, in the case of an owner-carry sale).
* Preparing a HUD-1 Settlement Statement at Closing (usually done by the title company or escrow agent at closing).
* Disclosing what percentage of loans you sell vs. keep
* Disclosing what amounts, if any, you are escrowing up front for property taxes and hazard insurance
RESPA does have a nice loophole; it does not apply to "short-term" financing. RESPA does not apply if the loan has a balloon or less than 2 years, with no promise to extend. I have always recommended a 2 year balloon on land contract sales for the purposes of control. Now there's another good reason!
Just would like to point out that I have had buying houses with the seller taking back < 5year balloon. The problem was with the primary lender. They didn't want to lend if the second wasn't higher than a 5 year balloon.
I have heard this from another source as well as my problem. Don't quote me on this but I think in NC you have to have a 5 year or higher balloon on mortgages.
Can any NC mortgage brokers back me up on this??
Thank you for pointing this information out to us all. Now I have another reason for having that 2 year refi on my contracts.
Thanks again
John
William Bronchick Esq.
Glad to meet you.
One more piece of excellent advice for all of us.
Thank you for sharing with us. I understand from various posters that you are a very busy person helping Real Estate Investors become successful.
For taking this time here I salute you.
Thank You,
$Cash$