Since January 2014, the Dodd-Frank Act and SAFE Act have thrown a wrench into the common use of land contracts. Land contracts have often been used as an unconventional financing mechanism for buyers that cannot get financing through conventional means, i.e. banks.
How did Dodd-Frank and SAFE Act change that? The Acts, in a nutshell, make three huge changes related to land contacts. The Michigan Department of Financial and Insurance Services is responsible for how the Act is applied in Michigan:
1. Due to the changes required within the Act, the Michigan Department of Financial and Insurance Services invoked a new requirement that certain individuals offering mortgages/land contracts and/ or qualifying buyers for mortgages/land contracts must be licensed mortgage loan originators-if they execute more than three (3) land contracts per year for residential /owner-occupied housing. So, if you’re using land contracts as the mechanism to sell your real estate, you’re very limited on how many deals you can do each year without becoming a licensed mortgage loan originator.
2. Due to the Act, the Department also stipulated new rules for qualifying buyers. Basically, the new rules make it impossible for a seller to sell a land contact to someone that doesn’t already qualify for conventional bank financing. This significantly limits the pool of potential buyers. And, frankly, is bad news for those that can’t qualify for conventional financing.
3. The Department also ruled that balloon payments could not be less than six (6) years, Under many land contacts in the past, a three or five year balloon payment was put in place so that the buyers could pay off the contract sooner and become conventional home buyers. This also enabled the investor to do more deals. The move to six or more years makes land contracts less, desirable for many investors.
Even though the Act doesn’t specifically say that land contracts are included, HUD, the regulating agency for the Act, says that land contract deals are included even though they aren’t mortgages. (But, wait a minute; I thought a land contract wasn’t a mortgage? HUD decided-after the Act passed and the rules were promulgated-that they meant to include land contacts. Unfortunately, it’s going to take a legislative change or court ruling to counter HUD’s opinion. Organizations across the country, including the RPOA, are trying to get the law changed! If you get a chance, contact your Congressman.)
What if you don’t comply? Under Dodd-Frank, the buyer can cancel the transaction and has the option to get his or her money back.
Note: The new laws do not apply to land contracts or other seller financing sales to other investors.
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Reposted from Michigan Landlord RPOA Magazine