Just imagine, after years of struggling to complete college, your son, little Johnny has finally has his head on straight. He graduated, he’s worked for the family business for two years and is doing well. He met a nice girl and they have married.
He wants to buy a home. Unfortunately, Johnny has not always made the best decisions. His credit is not where it needs to be. Based on the fact that he is now making better decisions, you decide to loan Johnny the money to buy the home. The title company you’re working with will prepare a note and mortgage to secure your loan, what could be easier, right?
That Darn Dodd-Frank! Your loan is probably in violation of this Act. Based on this violation, your note and mortgage may not be enforceable.
Dodd-Frank is federal legislation that came about as a result of the real estate crisis of the last decade. The Act created the Consumer Financial Protection Bureau (“CFPB”) and other laws that regulate all consumer loan transactions.
One of the other laws is the Loan Originator Rule. In general terms, if the borrower will use the home for residential purposes (whether a primary residence, a second home or a vacation home) then the person arranging the loan is defined as a “loan originator.” A loan originator must have a mortgage originator’s or broker’s license. Pursuant to the Act, any person who offers and negotiates terms of a residential mortgage is deed to be a mortgage loan originator. Unfortunately, for mom and dad above, there are no exceptions for a person, who is not a Seller, to secure a mortgage with a residential property.
The Act does provide for certain exceptions. Namely, Seller financing, these exceptions are as follows:
One property exception: A Seller may extend credit, secured by a mortgage encumbering residential property and is not considered a loan originator if:
(a) they are a natural person, estate or trust;
(b) they provide financing for only one property in a 12 month period;
(c) they own the property securing the mortgage;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) repayment of the loan must not result in negative amortization;
(f) balloon payments are allowed, however the term of the balloon is not clear. Most practitioners believe that no shorter time period than 5 years should be used.
(g) while the Act does not prohibit adjustable rates, a fixed rate is suggested. The Act has restrictions, limitations and caps on rate charges.
(h) the seller is not required to investigate the buyer’s ability to repay the loan.
Three Property Exception: A Seller may extend credit, secured by a mortgage encumbering up to three residential properties and is not considered a loan originator if:
(a) they are a natural person, estate, trust or an entity;
(b) they provide financing for three properties or less in any twelve month period;
(c) they own the property securing the mortgage;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) the loan must be fully amortizing and there are no balloon payments or structures allowed;
(f) while the Act does not prohibit adjustable rates, a fixed rate is suggested. In this context, limits and caps are required’
(g) the Seller is required to make a reasonable investigation regarding the Buyer’s ability to repay the loan. Although formal documentation is not required, the investigation should be done in good faith and the results should be maintained.
While other exceptions exist, they are very complicated and are not practical for ordinary Seller financers.
Good news is Dodd-Frank does not apply to every loan. First, it only applies to residential loans. So, if you’re dealing with vacant land, commercial properties, rental properties or properties used solely for investment purposes, Dodd-Frank simply does not apply. Moreover, Dodd-Frank does not apply to non-residential buyers. So, if the buyer is a corporation, limited liability company or partnership etc., Dodd-Frank will not apply and the loan can be made without consideration to its restrictions.
So, now that we know that mom and dad have a problem trying to help little Johnny buy his home, what are we to do?
One solution would be for the mom and dad (the lender) to purchase the property from the underlying Seller first. Then mom and dad as the Seller could sell little Johnny the home and take back the note and mortgage under the one property exception. Yes, the transaction costs would increase, but the creative closers at the Florida Agency Network will work with you to keep these costs down.
Another solution would be for mom and dad to work through a mortgage broker. The mortgage broker will be required to comply with all of the various lending laws and regulations. While the broker will likely charge a fee for this service, it is another option that will allow the transaction to go forward.
One of the regulations associated with the new TRID forms is a 3-day rule. The 3-Day rule mandates borrowers MUST receive the Closing Disclosure 3-days before the closing date. This new rule gives consumers the opportunity to review the closing disclosure and ensure all information is correct and correlates with the Loan Estimate.
However, what happens if any changes need to be made?
The infograph below explains three situations that would require a new closing disclosure and thus, delay your closing.
Page 3 of your Closing Disclosure will compare cash requirements from your Loan Estimate to your actual final charges. If “Did this change?” is “YES” notes for changed sections should be provided.
The bottom line final “Cash to Close” is the money you will need in-hand in three business days.
If your transaction has a Seller the summary table will show a line by line comparison of Borrower to Seller transaction details.
If there is no Seller you may see a Payoffs and Payments table instead.
Review the summary tables to understand the transaction and your financial commitments at loan consummation.
Page 2 of your Closing Disclosure details specific closing costs.
Section A includes: Origination charges collected by the lender Origination fees paid to brokers, loan officers or other parties and Discount Points - prepaid interest. These figures should match your original Loan Estimate.
Section B covers services for which you could NOT shop. The total of these should be within 10% of the total from your Loan Estimate.
Section C covers services you could shop. If you chose providers from the lender’s written list, costs should be within 10% of Loan Estimate. The set of services you can shop may vary on different loans.
The Recording Fees in Section E should be within 10%; other costs in E, plus F, G and H, may vary from your Loan Estimate without tolerance limits.
This page will also break out the costs YOU will pay, before or at closing; the costs the Seller will pay, any costs paid by others and any credits from your Lender.
The Closing Disclosure documents the actual terms of your loan transaction. You should receive it no later than 3 business days before consummation. It must be in writing - paper or digital.
If the loan terms or costs change prior to consummation, your lender must provide a corrected disclosure AND an additional 3-business-day waiting period until loan consummation.
Waiving the 3-day waiting period is only permitted in certain circumstances, and only when the waiting period would cause a bona fide personal financial emergency.
Page 3 of your Loan Estimate includes measures to help you compare loans.
“In X Years” shows the total amount you will have paid in that time, and the dollar amount applied to your loan principal. The ratio between total paid and principal reduced may change over time.
The APR shows interest PLUS fees as an annual ratio - APR is the actual percentage this loan costs per year.
The TIP figure relates the interest you will pay over the life of the loan to the loan amount. For example - a TIP value of 25% on a $100,000 loan means you will pay $125,000 - $100K principal plus $25K interest - over the life of the loan.
Page 2 of the Loan Estimate provides the current ESTIMATED cash to close. Some costs will stay the same between estimate and closing. Some will change.
These estimates of closing costs plus loan details, Down Payment, Deposits Credits and Adjustments are used to calculate your estimated cash requirements when the loan finally closes. Consider the possible changes and tolerances when evaluating a loan decision.
Real estate transactions require taxes, certain pre-payments, and escrow funding.
Recording fees are charged by government agencies for keeping legal ownership records, while “transfer taxes” may be imposed by states, counties and municipalities on real estate ownership transfers.
Prepayments may include homeowner’s insurance premiums on the property mortgage insurance, if required property taxes for a period of months in advance, and prepaid interest, typically for the period from closing to the first mortgage payment.
Escrow funding may also be required against future annual charges for homeowners insurance, mortgage insurance and property taxes.
Title insurance on YOUR legal ownership - “Owner’s Title Policy” - may be designated as optional, which only indicates that it is not required by this creditor.
Some of these “Other Costs” may vary substantially between Loan Estimate and Closing Disclosure ask your lender about the tolerance rules or watch the video “Could My Loan Cost Exceed The Loan Estimate?”
These costs are paid to outside parties and YOU are free to shop and compare providers for a variety of services. These might include pest inspection, or a survey to verify property lines or a range of Title-related services.
Title services might include:
If you select service providers from the list provided by the lender, their fees cannot change by more than 10% between the Loan Estimate and the final Loan Disclosure. If you select other providers the lender is not responsible for changes in those costs.
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