When it comes to seller-financed loans, there’s a lot of confusion around what’s required from borrowers—and what rules lenders need to follow.
Let’s clear a few things up.
Myth #1: “If it’s seller finance, there are no rules.”
This is a dangerous misconception. While it’s true you don’t need an RMLO license if you originate three or fewer loans per year, you’re still required to comply with key regulations like Dodd-Frank, TRID, and RESPA. That means validating the borrower’s ability to repay—looking at income, debt-to-income ratio, and overall creditworthiness, and also sending out the required disclosures on certain timelines..
Myth #2: “If I have to follow Dodd-Frank, I need to do bank-level underwriting.”
Also wrong. Dodd-Frank simply sets a minimum threshold for underwriting. As the lender, you can define your own standards—as long as they meet or exceed that minimum.
Here’s what’s interesting to me: that Dodd-Frank bar was set because banks had gotten too loose with their standards pre-2008. Ironically, banks have now gone in the opposite direction and become overly restrictive. That’s created a growing gap between what Dodd-Frank requires and what banks require.
That gap? That’s where seller financing lives.
Next week, I’ll dig deeper into this seller finance gap—with some eye-opening data to help understand it better..