POTENTIAL LOAN REGULATIONS FOR OWNER FINANCED SALES

Very few Real Estate entrepreneurs, builders, or investors realize that when they sell a property on an owner financed basis, where they actually extend the financing to the buyer by taking back an owner financed Mortgage, Trust Deed, or Land Contract; they may be acting as a "lender" under the law. Please bear in mind that when you sell a property and finance it, it is considered an extension of credit. Depending on the nature and frequency of your financing activities, in addition to state consumer and lending laws, you may need to also comply with Federal regulations.

One of the first law’s you need to become familiar with is called "Truth-in-Lending." Truth in lending, also called "Regulation Z", applies to anyone who "regularly" extends credit. Past litigation of this definition has come up with a very liberal definition; if you are selling residential Real Estate properties to consumers who intend to live in the property as owner occupants more than a few times during a year’s timeframe, and you are also extending owner financing to them, you can be construed as being a lender within the statute.

Under the law, a lender must disclose certain financing terms, such as the Annual percentage rate, amount financed, total interest paid.

If you extend credit exceeding $1,000,000 per year secured by real estate used for the borrower’s residence, you must also 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 basic compliance, which involves:

1. Providing the prospective borrower/buyer a "good faith estimate" of estimated closing costs within (3) three days of their completing a loan application or signing and entering into a Purchase & Sale contract where owner financing is involved in the sale.
    
2. Having a HUD-1 Settlement Statement prepared and provided to the borrower/buyer at the time of Closing (this is usually done by the closing title company or escrow agent).
    
3. Disclosing to the borrower/buyer what percentage of Owner financed loans you sell vs. may keep.
    
4. Disclosing to the borrower/buyer what amounts, if any, you will be escrowing up front in an escrow impound account for the future payment of property taxes and hazard insurance premiums.

Samples of some of these forms can be found on our web site here.