Seller Financing

Owner financing also known as Seller financing allows buyers to purchase a property without relying on a bank for a loan. Owner financing in Texas enables the seller and buyer to customize a financing agreement to make it suit their particular situation. This can simplify the process of buying or selling by using Owner financing for both buyers and sellers by eliminating the need for a lender, appraisal or inspection; unless the buyer wants them.

A traditional owner-financed transaction involves conveying a paid-for property to a buyer by a warranty deed. The seller takes back a real estate note, secured by a deed of trust and the borrower makes their monthly payments directly to the seller or seller third party servicer. The deed of trust in place usually becomes a first lien against the property, if the buyer defaults; the seller can foreclose in the usual manner.

Key Features

• Warranty Deed with Vendor’s Lien – The most common form of Seller financing is through the use of a Warranty Deed with Vendor’s Lien; these are the same instruments used by the lender or bank when Third Party financing is used.
• “Common sense underwriting” – flexibility to understand your individual situation.
• No balloons – adds peace of mind knowing the loan is fully amortized for the agreed upon term with the seller.
• No prepayment penalties – you won’t be penalized for making extra payments on your principal balance or by paying off the loan quicker before it matures.
• No PMI – No private mortgage insurance, saving your thousands every year.
• Fixed rates – your rate will not increase or decrease with the prime rate or index rate changes.
• Low down payment options – keep more money in your bank for reserves.
• Improvements Financed: Seller may be able to finance the well, septic, or other improvements on lots/ranches.
• Taxes and insurance are escrowed – no need to save up money for these expenses every year.
• Title insurance in many cases is optional – depending on the seller/lender, you may be able to opt out and save hundreds in additional closing costs.

When you borrow from a bank, you need to follow certain legal formalities. The same happens when you borrow from a seller/lender. Banks have strict underwriting guidelines but in an owner finance arrangement you can buy a property with less than perfect credit and provide alternatives sources of income. However, due to changes to state and federal regulations now seller finance lenders must adhere to the same regulations as banks, making the owner-financing process more difficult than before. In example, a seller that arranges the sale of 3 non-homestead property to a non-family member (per year) must obtain a residential loan originator license. Many prefer to have their loan processed and originated by a Residential Mortgage Loan Originator (here after RMLO) to ensure full compliance with the SAFE Act.

The RMLO e.g. Miyaki Financial Inc., acts as a liaison between seller and buyer and collects necessary documentation acceptable to the seller to obtain their loan approval. The RMLO has a fiduciary obligation to the borrower and helps with all questions regarding the financing of the property including pre-approving the borrower before a contract is signed. The RMLO is paid an origination or processing fee at the closing at the agreed upon amount by the party stipulated in the sales contract.

Documentation Required

• Loan Application – A loan application will be required for all buyers/borrowers/guarantors on the note.
• Credit Authorization – we will do a soft credit check on all buyers/borrowers/guarantors to verify their monthly liabilities.
• 2 Forms of Identification: 1 must be a government issued unexpired identification – this is needed for notary purposes for the closing, e.g. a passport, or driver’s license. The second form can be a consular ID card from another country, social security or ITIN card.
• Proof of Income – You will be asked to provide third party proof that you can repay the note. See our required documentation checklist for more info.
• Proof of Residency – You will be asked to provide copy of your lease agreement (if you rent) along with a current utility bill in your name to verify your USPS mailing address.

Closing Costs

• Loan Origination Fee – A loan origination fee will be paid at closing, by the party stipulated on the sales contract.
• Credit Report fee – Actual fee to be reimbursed to the RMLO for a soft credit check will be collected at closing.
• Recording fees – Actual recording fees to record your deed, deed of trust and any other document required to be recorded will be collected at closing.
• Property Tax Escrows: Ad valorem taxes are deposited with the seller-lender at closing into an escrow account.
• Mobile Notary – (Optional) if you prefer to close at your place or business or home, you will pay their fee directly for their services.
• Insurance Escrows: (excludes land) 2 months of insurance is deposited with the seller-lender at closing into an escrow account.
• Homeowners Insurance – (excludes land) You will need to prepay 1 year of Insurance at closing. The policy must have the correct mortgagee clause and provide sufficient dwelling coverage meeting one of the following criteria 1) Cover the lower of the replacement cost or total loan amount or 2) Terms to show guaranteed full replacement coverage.
• Loan Boarding/Set up fee – (only as applicable) If the seller-lender uses a third party servicer, normally a set-up fee is collected at closing t, plus a monthly fee is added to the payment.
• Attorney fee – (only as applicable) If the seller-lender uses an attorney to prepare their note, deed and deed of trust a fee may be due at closing.
• Title Policy – (Optional) if you choose to close at a title company, you will pay an escrow fee, plus their third party fees.

A loan application will be needed for all borrowers along with a credit authorization. The seller may want to see your credit report so that the RMLO can verify if you have enough residual income left over after meeting all your monthly obligations to repay their note. The seller is often flexible and accepts alternative sources of documentation and does not require a “minimum” credit score or frowns on credit blemishes since they are the decision maker in the transaction.

The Loan Process

We highly encourage you to get pre-approved for a loan before entering into a contract.

STEP 1: A sales contract or purchase agreement is executed by buyers and sellers.
STEP 2: A loan application is submitted by the borrower(s) on the loan to the RMLO.
STEP 3: Loan Disclosures (as applicable) are delivered to all borrower(s) on the loan.
STEP 4: Income documentation is submitted to the RMLO to review.
STEP 5: Loan is submitted to Seller for approval; and a Closing Disclosure is issued and closing scheduled.

Waiting Periods

If you are purchasing the property for consumer purpose e.g. primary or household use, you can close on the property within 7 days of acknowledging receipt of your Loan Estimate but not before 3 days of signing a closing disclosure.

Note: If you are purchasing the property for business purpose, you are exempt from any waiting periods or disclosures and can close on the property as soon as you, seller and Title Company are ready.

The Loan Closing

Once the seller/lender approves the loan and borrower has signed the required loan disclosures and applicable waiting periods required by law have passed; the loan is then “cleared to close”. The seller’s attorney or seller agent prepares the warranty deed with Vendors Lien that is used to convey the property, and it is it sent to the Title Company and or RMLO to schedule the closing. The closing is handled by a Texas Notary public at the title company or RMLO’s office or your home or place of business.

Laws Applicable To Owner Financing

• The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
  TILA-RESPA Rule Effective October 3, 2015 requires a Loan Estimate (LE) to be provided to consumers no later than the third business day after they submit a loan application. The LE was designed to help consumers understand key features, costs, and risks of the mortgage loan for which they are applying.
  Closing Disclosure (CD) was designed to provide disclosures helpful to the consumer understanding all of the costs associated with the transaction. The form is required to be provided at least 3 business days before consummation of the loan.
  Escrow Requirements under the Truth in Lending Act (Regulation Z) The rule is effective June 1, 2013. Requiring creditors to establish escrow accounts for certain mortgage transactions to help ensure that consumers set aside funds to pay property taxes, and premiums for homeowners insurance.
  Title XIV – Mortgage Reform and Anti-Predatory Lending Act It requires that a seller-lender in a residential owner-financed transaction determine at the time credit is extended that the buyer-borrower has the ability to repay the loan.
• The 2009 SAFE Act which requires that sellers of non-homestead property to non-family members have a residential mortgage loan origination license;

Disclaimer

Texas does not require title insurance. Usually, sellers financing their own property do not make it a requirement for the buyer to purchase a lender title policy, but buyer should always consider purchasing an owners title policy. The owner’s policy protects you against losses from ownership problems that arose before you bought the property, but that were not known at the time you bought the property.

Visit TSI for more info regarding Title Policies: Title Insurance FAQ (texas.gov)

Bankruptcy: If you have an active bankruptcy, you may not be eligible for the loan.

Information provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. This is our interpretation of the law, the law changes. A seller and buyer should consult with a real estate attorney before entering into a contract that calls for seller financing. Consult your tax advisor as well.