The rules have changed to purchase real estate, thanks largely to the Consumer Protection Legislation that has been implemented over the last several years, most notably the Dodd-Frank Act. The year 2014 has brought in several new rules that affect the home buyer, the REALTOR® and the seller – especially if the seller is an investor.
Perhaps one of the biggest challenges revolves around owner carry-back financing. In the past it has not been unusual for a seller to carry a small (sometimes large) note to help the buyer qualify for a bank loan to purchase a home.
It has been a great tool helping the seller get their price while assisting the buyer obtain the home they had their heart set on. In many cases a seller carry-back was for a short period of time – perhaps one to three years. Typically it would be an interest-only loan with a principal balloon payment due at the end of the note period.
There were even loans made by private individuals helping people buy their new home and in many cases these loans were not always disclosed to the bank. These loans were commonly called “silent seconds.”
Today, just about everything mentioned above is against federal law. An owner carry-back must be fully disclosed to the First Lender, making “silent seconds” illegal. Any real estate agent who helps facilitate one on the down low – or even had mere knowledge of a silent second runs multiple risks including sanctions by the California Bureau of Real Estate (BRE, replacing the CA DRE), Civil Judgments and possibly even bank fraud charges – faces a federal offense.
In addition to the trouble the agent may find himself, the lender runs the risk of losing all of their money and interest in the property if a civil court finds the loan to be “null and void.”
While a home seller may still carry back a second loan, the loan must be fully amortized so that each payment includes both interest and principal and there cannot be a balloon payment.
The term of the loan cannot be less than five years and the interest rate must remain “fixed” for the same five years. Not many sellers have the financial capacity to hold a note to maturity. On top of this, the seller must use a “private beneficiary” to “service the note” and possibly proceed with a foreclosure, if one should become necessary.
An investor has his own hoops to jump through.
While an investor may use the seller carry-back as a tool to sell a home or two, the investor is limited to three carry-backs in a 12-month period. To use the tool a fourth time, the seller must have the same NMLS license as everyone else who makes loans. Having the NMLS license means the lender must be in full compliance with every aspect of the Dodd-Frank Act and other legislation of the books geared at protecting our fragile housing market and protecting the consumer.
How long has the seller owned the home?
Seller acquisition time refers to the time an investor has from closes escrow when purchasing the property and the date the buyer closes escrow again on the resale known as a “flip.” Just for the record, the flip rules written and enforced by the government don’t always apply to homes controlled by the government.
Controlled by the government exceptions include sales of HUD homes, foreclosures by a state or federally chartered bank, GSE’s (Fannie Mae, Freddie Mac, etc.), sales by any local or state agency, and non-profits approved to purchase and flip HUD REO properties, to name a few.
FHA guidelines do not allow for flips that the seller has owned less than 30 days, without one of their documented exemptions.
Flips with less than 90 days since the seller Aacquisition which are being sold for more than 120 percent of the previous purchase price will require a second appraisal as well as a home inspection with evidence that all repairs and renovations have been made with an executed property inspection certification.
Homes that increase less than 120 percent since the seller acquisition may also require a second appraisal and the loan amount will be on the lesser of the two appraisals. The cost of any second appraisal cannot be paid for or reimbursable by the buyer.
Scratch the surface
Issues discussed here only scratch the surface of some of the changes in the world of mortgages and how they affect transactions and the various parties involved. The bottom line is the new law is in effect and it’s the way business is done today.
It’s always amazing how often someone will boast of their experience in buying a home in the past and think it’s all the same. My advice is to find yourself a good team to work with – a qualified REALTOR® and a qualified NMLS licensed mortgage lender who can work together to help you navigate the minefield of home financing.
Be open, honest and forthright with your team. Remember they are on your side – they have a fiduciary responsibility to protect your rights and help provide you with the right council so that you can make the right decisions. Just like you need the information your team provides, they need your honest representation of your scenario so that the information they provide is the very best for you; after all, it’s your home and your life we’re talking about
Call us today and get the information you need to make the right decision. The information is free, call now! (951) 296-8887
Questions regarding available inventory and/or other real estate matters please contact me, [email protected] Mike Mason, Broker/Owner of MASON Real Estate Cal. BRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Traveling State Director, California Association of Realtors® (C.A.R.).