You are not set up or licensed as a finance company, therefore you cannot do this. Once again, if you owned the asset, you could place a mortgage on it from this guy for whatever you want and sell it for whatever you want. You don’t, therefore you are lending money. Period, end of conversation. I am not an attorney, but if you are seriously considering this loanshark deal, instead of debating theory, I would strongly urge you to find one now. But, who am I to tell you? I only deal with finance contracts on a daily basis.
An owner of a house who’s currently late in payments needs to borrow 20k to make up for the back payments and taking care of his other financial issues. I’d like to write a note for 30k (even though I’m letting him borrow only 20k) with interest rate of 7% annually and a balloon in 1 year. Is this legal? Would it be considered as usury? If it is, is there any way to make it legal?
Posted by Mike Childs on July 29, 2003 at 12:20:56:
You’re basically charging 33 points for the loan + 7% of 30k for one year. That makes your return and his APR around 40%. Definetly usury in South Carolina and probably in your state as well.
I?d be less concerned about usury laws and more concerned about marketability. If as you say you intend to sell the note and the total LTV is 55%, a new first at 55-60% LTV is a sellable note (2nd are hard to sell if the borrower is credit challenged).
WHOA, phong. Hold up a minute. I’m sure you’ve already been over all this, but just in case, I hope you take into consideration the following factors:
If he’s already proven he cannot make his house payment on time, what makes you think he’ll pay you? I assume, at this point, you have satisfied yourself that he at least believes he will and can pay you back. Nevertheless, unless you know a whole lot about his guy (like maybe he’s your brother, lifelong best friend, or he saved your life or something), better make sure you include a mortgage with that note, that way you can at least foreclose and get the house if he doesn’t pay. In fact, even if it’s your Dad, get a mortgage.
What is the house worth? What will your loan-to-value be? If the balance of the first plus your 2nd is much more than 80% of the value of the house, you are in a very risky position. Assume that the guy can and will pay you back, exactly as planned. What if, God forbid, he gets hit by a truck and can no longer work? You must then make payments on the 1st, or they will foreclose. If the loan-to-value is very low, you are ok. You just make the payments to prevent foreclosure while you sell to get your money back.
Ken is right, every state has a different idea about what usury is. I don’t know what state you are in, but I cannot imagine that 7%, or even 10% would be usury. In my opinion you should either charge a higher rate.
I don’t care too much about his ability to pay back because the LTV, including my note, is only 55%. This is not really a note but a Deed of Trust that I’ll be creating. My concern is creating a note for 30k when I’m actually letting this guy borrow only 20k. Would this be a problem? I live in Seattle, Washington.
While creating this DOT, would it be better to have a balloon (1 year to 5 years) or would it be better to not? I’m planning to sell this DOT soon after creating it. How much do you think I could get for it?
What you are proposing will almost certainly be in violation of most state usury laws. I don’t have a calculator handy but you are proposing lending 20k with a total of monthly payments of 30k + 7% per year interest. This is basically a way to boost your yield to an acceptable risk factor. It would be a completely different story if you owned the asset. You don’t, therefore you are lending cash, which puts you under the federal statutes of regulation Z, more commonly called truth in lending laws. A halfway decent consumer rights attorney would crucify you. Please talk to an attorney before you get into something you can’t get out of.
Watch out. This may well violate the usury statute.
I recommend strongly that you get legal help with this note. Also, talk to some mortgage brokers who work with private investors to find out what terms you should include that will make the note and deed of trust be most attractive and increase the price you will get for it.
A moderately short term loan is usually more attractive to investors. They like to have their money out for at least a couple of years, but they do not want it out for a long time, say 10 years or more. Again, talk to a mortgage broker about terms to include.
Please read the statement below concerning Regulation Z. I’m not extending any credit or offering any. I’m lending hard-cold cash here. Does this apply?
The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act, is aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. In general, this regulation applies to each individual or business that offers or extends credit when the credit is offered or extended to consumers; the credit is subject to a finance charge or is payable by a written agreement in more than four installments; the credit is primarily for personal, family or household purposes; and the loan balance equals or exceeds $25,000.00 or is secured by an interest in real property or a dwelling.
I have kicked nobody out of his home. I’m a beginner. People with good credits, income, assets… can default, too. One of my ways of determining whether something is a good investment decision is the LTV… It sounds cruel but I’m sure a lot of us here do it, too.
I’m prepared to handle the costs involved since the reward is high.
This guy doesn’t like to sell his home unless he gets top dollars out of it. This is not something I could offer…
I’m not extending any credit or offering any. I’m lending hard-cold cash here.
That’s exactly what you are doing! You are giving cash for terms. basically, you are offering $20,000.00 for a payback of $30,000.00 + interest. Let’s take off a couple of zero’s and see what it looks like. I’ll give you $20.00 today if you’ll pay me $35.00 by friday. It’s called loansharking in most parts of the world.
Have you tried lending something at the Lending Tree? I think they’re doing the same thing…
Furthermore, this person would stand to lose the house in a month if he can’t come up with the money for the backpayments… He doesn’t want to sell… What should I do in such case?
What if you bought something else from him that was hard to value? Say he has a used 1987 Mustang convertible, or a vacant lot, or motor home, or anything. Buy this as well as lend the money, using the deed of trust as collateral. Do not assign value to the car or whatever, just lump it all together. Then, it would be impossible for anyone to figure your rate of return.