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Effective January 21, 2013, the Dodd-Frank Act will generally require all residential mortgage loans, including seller carry back financing, to be offered and negotiated by licensed loan mortgage originators.
There is an exception from this requirement for a seller, whether an investor or "Mom and Pop" owner of a home, offering seller carry back financing. This exception is as follows:
1. Seller determines, with supporting documentation, that the buyer has a reasonable ability to repay the loan.
2. Fixed interest rate of at least five years.
3. No balloon payment.
Note: In other words, whether the loan is for five years or for 30 years the seller carry back financing must be fully amortized over the term of the loan. There is no prohibition, however, against due on sale clauses in the seller carry back financing; due on sale clauses are effectively a form of balloon payment.
4. No more than three seller carry back financing loans in a 12-month period.
If these requirements are not met, there are significant penalties such as treble damages in the amount of interest paid by the borrower.
Bottom line: unless this provision in the Dodd-Frank Act is amended, seller carry back financing as we know it today will be severely restricted.
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