Law May Stymie Your Carry-Back Mortgage Plans

It’s not good news for a seller when your buyer can’t qualify for a mortgage from a bank. In this situation, the seller has two alternatives: He or she can start looking for another buyer, or act as the bank for the buyer and carry the mortgage him or herself. To both the seller and the buyer, this may sound like an ideal plan, but thanks to a rule implemented in 2010, this option may not be the best choice for either of you.

In the past, if the seller had sufficient equity and didn’t need an influx of cash, he or she simply had the buyer’s credit verified, became familiar with the state’s mortgage default and foreclosure laws in case the buyer’s payments ceased, and “carried the paper.”

Assuming all went well at the closing of the transaction, the mortgage note could then be sold to an investor at a regular discount.

In the last few years, however, sellers have been required to comply with Dodd-Frank, a law that restricts sellers who want to carry their buyers’ mortgages.

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted into law on July 21, 2010, it said that you could only do three seller carry-back transactions a year, and those transactions had to meet certain requirements:

  • The note could not have a balloon (a payment required at the end of a mortgage loan to repay the balance)
  • It had to have a fixed interest rate for five years; then it could be adjusted
  • The seller had to prove and document the buyer’s “ability to repay” in accordance with the Qualified Mortgage rule (QM), which is quite restrictive.

If you are interested in this option, before volunteering to become your buyer’s bank, you would be wise to consult an attorney familiar with carry-back mortgage laws.