When You Are the Bank

Sources: Regulation Z’s Loan Originator Rule under the Dodd-Frank Act (one property and three property seller financing exclusions for consumer purchases of an owner occupied dwelling); Code of Virginia § 6.2-400 (late charge limit), § 6.2-317 (no usury defense on business or investment loans of five thousand dollars or more), and § 6.2-328(E) (subordinate mortgage charge limits do not apply to a seller taking back a deed of trust); Code of Virginia § 11-2 (contracts concerning land in writing).

Owner financing can close a deal a bank would not touch, and it can earn the seller interest on top of the price. But the person carrying the loan takes on a lender’s risk with none of a lender’s infrastructure. The documents have to do all of that work, and federal rules decide how a residential deal can even be structured.

Owner Financing Services

The documents that protect the party carrying the loan, from signing through payoff.

Any contract for the sale of land must be in writing, and Virginia is a deed-of-trust state, which means a properly drafted and recorded deed of trust allows the noteholder to foreclose through a trustee without going to court if the buyer defaults. When the buyer is a consumer purchasing a home to live in, federal law treats the seller as a loan originator unless the deal fits an exclusion. A person, estate, or trust financing one such property in a twelve-month period can carry the loan without licensing, so long as the note does not negatively amortize, carries a fixed rate or an adjustable rate that resets only after five or more years, and permits a balloon payment. Financing up to three in twelve months also applies to entities, but the note must fully amortize with no balloon, and the seller must determine in good faith that the buyer can repay. Vacant land, commercial property, and buyers who will not live in the home sit outside those rules entirely. On the Virginia side, a late charge cannot exceed five percent of the missed installment and must be written into the contract. Business or investment loans of five thousand dollars or more carry no usury defense, and the charge limits on subordinate mortgage loans expressly exempt a seller taking back a deed of trust in a sale. One structure deserves caution: an installment land contract, where the buyer gets the deed only after the final payment, leaves the buyer without title for years and the seller with a messier path on default, which is why a deed up front secured by a note and deed of trust is usually the cleaner design for both sides.

Get the Loan Documents Done Right

If you are carrying the loan, the paperwork is your only protection, and it is far easier to draft it correctly than to fix it after a default. Tell us about the deal. Serving Leesburg, Fairfax, and all of Northern Virginia.