Texas Owner Financing Laws

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The state of Texas has recently seen strict legislation against real estate investors who were participating in certain types of owner financing. While not all forms of seller financing are outlawed, land contracts, also called contract or agreement for deed, are now illegal. Lease option deals -- also called renting to own -- have become tenant-friendly. And investors who flip houses need to secure lending licenses.

The SAFE Act

  • In 2009 the Texas legislature passed House Bill 10, otherwise known as the SAFE Act. The SAFE Act was designed to protect unsuspecting buyers from unscrupulous sellers who earned bad reputations by selling homes that either didn't have clear titles or needed expensive repairs that buyers would be unable to remedy. When the buyer eventually defaulted, the seller would foreclose and repeat the process. The SAFE Act states that Texas homeowners may only owner-finance five times per year.

Exceptions to the SAFE Act

  • The SAFE law doesn't apply to a seller who is making a deal with an immediate family member, meaning that the seller does not need a residential home loan originator license. Immediate family members are defined as a spouse, child, sibling, parent, grandparent or grandchild, according to the Herald Banner. Family members may be by natural birth, adoption or marriage. In addition, if a seller is selling his own home via seller financing, the SAFE Act doesn't apply and he doesn't need a license.

Penalties for Violating the SAFE Act

  • Texas means business with this legislation, and it has established stiff penalties for those who engage in unlawful lending practices. Not only is violating the SAFE Act a criminal offense -- it's a misdemeanor -- it's also punishable with a $25,000 fine in addition to buyer restitution. The contract may be revoked and a restraining order initiated against the seller to prevent future lending activity. As a result, the only legal way for a seller to finance a buyer is to secure a lender license, unless there is a qualified exception.

The Loan Originator Test

  • A Texas investor who wishes to seller finance must pass the SAFE Mortgage Loan Originator Test to obtain an originator license. The investor must also finish at least 20 hours of pre-licensure education and pass a background check. The background check includes a criminal history review, with fingerprints, and also a credit check to establish creditworthiness. The other way for an investor to get around the SAFE Act legislation is to use a third-party lender -- although investors may not find that option appealing.

References

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