By Andy Tiwari
Historically, owning a piece of land has been a life goal for many Americans. However, as many people are finding today, landing a mortgage to purchase a home is much more difficult than in the past.
Real estate transactions in Texas prior to 2008 didn’t have as many restrictions as today. It was extremely easy for sellers and buyers to enter into deals with creative financing programs. But it was those “easy transactions” that helped spur the crash of the real estate market and that caused many consumers to lose both their homes and savings.
To help the cash-strapped would-be buyer, some would-be sellers opt to finance the deal themselves. While owner financing is still a viable option today, sellers should work with experienced real estate attorneys to prevent a potential lawsuit. The laws dealing with owner financing have changed drastically and are state-specific, so generic forms from the Internet are likely a lawsuit in the making.
Here are a few things to remember if you are a seller wanting to provide financing.
SAFE Act – Sellers who engage in more than five (5) owner-finance transactions in a 12 month period must now have a Residential Mortgage Loan Originator License according to the Secure and Fair Enforcement for Mortgage Licensing Act, also known as the SAFE Act. There are other exceptions to this law for cases where the seller is providing a mortgage to family members or when a seller decides to provide financing to sell his or her primary residence to someone else.
Dodd-Frank: Title XIV: Mortgage Reform and Anti Predatory Lending Act states that sellers can no longer enter into a contract without first checking to determine whether the buyer can actually afford the house. This law was written to prevent creative financing deals that many cash-strapped borrowers can’t actually afford. For instance, mortgages cannot be structured now with balloon payments that are twice as large as earlier payments; the law also prohibits pre-payment penalty fees. Dodd-Frank does contain varying exceptions for sellers who owner-finance 5 or less residential property transactions in a 12-month period and for sellers who finance 3 or less residential property transactions in a 12-month period. Many of the rules relating to Dodd-Frank will become effective January 10, 2014.
Texas Property Code Section 5 – Texas disfavors ‘executory contracts’ such as contracts for deed and leases that have an option to purchase the underlying residential real estate. These were classic options for individuals who couldn’t otherwise qualify for a mortgage, but they also had the potential for abuse by unscrupulous sellers. Under the amended property code, sellers must now provide buyers a property survey, list of any liens against the property and a checklist of the condition of the house (among other things). Under this new code, sellers must also clearly disclose the terms of the ‘financing contract’ and any penalties fees that could be assessed. If done incorrectly, buyers can cancel the transaction and recover their deposit, among other remedies. Failing to abide by the Property Code can also constitute an ‘automatic’ violation of the Texas Deceptive Trade Practices Act and give rise to substantial claims for damages by the buyer. While it isn’t impossible to do a contract for deed or lease-purchase option, they must be carefully tailored to comply with applicable law.
Above is just a snap shot of some of the new changes in real estate law that should make sellers more cautious before entering a contract involving seller financing. It’s also wise to revisit the U.S. Department of Housing and Urban Development’s website on settlement costs and information so you can get an idea what to expect in a traditional real estate transaction.
If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167