The Secrets To Investing With Owner Financing
The Secrets To Investing With Owner Financing
The housing crisis is a major crisis in the United States right now and one of the major contributors to the economic recession that we are experiencing right now.
Part of the reason why there is a crisis is because of lax lending requirements by mortgage lenders. When lenders offer loans to home buyers who clearly aren?t in the position to afford a home, this causes unnecessary strain on the economy.
However, there is a certain piece of legislation that is currently being considered right now that if it is passed could cause a huge challenge to investors that use owner financing as part of their overall real estate investment strategy.
The proposed bill has already passed the House of Representatives and is currently being reviewed by the Senate. If it passes in its current form and the President signs it into law, you could see a dramatic reduction in the number of properties that are made available for sale using owner financing.
If you read our last issue, you know that owner financing is when the seller of the property offers to finance some or the entire purchase price of the property. The benefit of this type of sale for the owner is that it allows him or her to sell the property faster.
The benefit to the buyer is that if the buyer has difficulty qualifying for a mortgage or doesn?t like the terms that are available with traditional financing, owner financing is often an option that can allow this to be viable option for the buyer.
The purpose of this legislation is to reform consumer mortgage practices and provide some level of accountability to mortgage practices because the government obviously wants to prevent a similar foreclosure crisis from happing in the future.
The legislation has a number of requirements that a lender must meet in order to provide a loan to a homeowner. If the lender fails to meet these requirements, this can result in drastic action such as civil money penalties and even mortgage rescission.
Mortgage rescission is when the borrower is able to cancel the note. The borrower will have to refinance the property or sell it, but the lender (in the case of owner financing, the previous owner of the house) loses all interest in the property if they are found to be in violation of the new law that is currently under consideration right now.
So how does the proposed law affect owner financing?
The key to the legislation is in the definition of mortgage originator in the terms of the legislation. The bill is House of Representatives bill number 1728: Mortgage Reform and Anti-Predatory Lending Act.
In Section 101, the definitions, it defines who is considered a mortgage originator. One of the definitions outlines who is not considered a mortgage originator and directly relates to owner financing. It says as follows:
(E) does not include, with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 1 property in any 36-month period, provided that such loan--
(i) is fully amortizing;
(ii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;
(iii) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and
(iv) meets any other criteria the Federal banking agencies may prescribe;
So what this means is that according to this law, if you provide owner financing on more than one property every three years, you are now considered a mortgage originator and you are subject to the terms and conditions of this new piece of legislation. This certainly applies to owner financing such as an owner held mortgage and it could potentially apply to lease options as well.
So how does this affect you as an investor if you purchase and/or sell properties that have owner financing or lease options?
If this legislation passes, you will only be able to sell one property every 3 years with owner financing to not have to follow the rules outlined in this legislation. That owner financing will need to be a fully amortizing loan, which means the principal and interest needs to be completely paid in full by a certain date.
You will have to show that you have documented that the buyer can repay the loan. The loan will have to be a fixed loan or an adjustable loan that doesn?t adjust until at least 5 years. You will also have to meet any other criteria that the federal banking agencies decide.
If you sell more than one property every 36 months with owner financing you will be subjected to this new law.
If this law actually passes under its current form, you can expect to see a drastic reduction in the number of properties that are sold with owner financing. It?s not like you are giving money to the borrower like a lender does. You are providing use of a house that you legally own, with the right to take the house back should the borrower not meet the terms of the agreement.
There are ways around the new law. For instance, you could become a full fledge mortgage broker and follow all of the rules and regulations required. However, many investors aren?t going to be willing to do that.
For more information on the new legislation, you can view all the details on the following website:
http://www.govtrack.us/congress/bill.xpd?bill=h111-1728
If you feel that this legislation shouldn?t be passed in its current form, make sure you let your state senator know.
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