That’s the same in most states. Mortgage lending and consumer lending(which is what credit cards fall under) laws differ in each state. Another way to spruce up your yield and make more on a mortgage loan is to buy the property low and sell higher and carry the mortgage. In these situations effectually make your points in the profit spread of the sale of the home, while still keeping the actual interest rate, and APR, within the bounds of the law. You are making those “points” from the seller of the home, as in buying preexisting mortgage for a discount.
Finley,
If you are refering to the points that a mortgage broker or lender charges to a buyer no you cant get around it. But there is another way, if you sell on the Note side. The seller is the one who takes the hit on the deal not the buyer so you can charge as many discount points as needed to do your deal as long as the seller agrees with it.And in addition to that the seller can create a second mtg to cover the discount if they want. In fact as a Note broker myself I have a few Mortgage Brokers run there deals through me for this very reason.
I guess this old mind is getting slow…because I don’t see how this works…perhaps you can help.
Let’s say that I as XYZ Corp own a property that I sell with an owner-financed note at 11% interest to Buyer B (to be within a usury law). I know that I can sell this note to ABC Corp at a discount, which then gives them a higher return than 11%. No problem so far.
But how do I as XYZ Corp get higher than 11% if that happens to be the limit under the usury law? It seems to me that this is what the question above is asking. Without setting up some type of sham transaction between related parties to facilitate this, I’m not seeing how this is accomplished.
I asked simply because I have seen, on this site, methods investors use to get around the due on sale clause in mortages.
Specifically I live in arkansas and its usury law limits interest to 5 points above the fed rate. The law also states that it does not circumvent any federal law pertaining to real estate sales.
What I need to know is there a federal usury law for real estate.
Jim,
You are correct in the fact that if the maximum rate is 11%, that is all you can charge legally.
Also, what you are refering to is correct on the original question. I quess I was side steping the question into a different area on a way to make up front money in a brokers situation rather than someone who is actually going to hold the Note and wanted a higher rate of return.
In your example you are right the rate could only be a max of 11% in that situation. But on the Note side it will not throw the deal into a usury situation no mater how big the discount is because the seller takes the hit on the sale of note not the buyer and it’s not really a loan when the Note is purchased.
As appossed to the lending side the fee’s are added on top of the loan and it may throw the rate into usury danger zone if a broker is trying to get a hefty fee.
Your mind is working fine I just triped it up when I side steped the question.
Maybe I need a little education here, but I thought that the usuary laws do not pertain to real estate transactions, specifically owner financed deals.
Quoth Finley: “I asked simply because I have seen, on this site, methods investors use to get around the due on sale clause in mortages.”
Well, theres a pretty big difference here. The DOS is simply a clause in a contract, and the most that will happen for violating it is the lender could call the note due.
Usuray laws, on the other hand, are statutes enacted by State and federal governments. Penalties could include hefty fines and jail. Best tread lightly in this area and don’t charge exorbitant interest.
Someone posted here the other day about Arkasas (?) where max interest is a couple points over prime or something. How do those 21% credit card companies deal with it??
Each state approaches Usury a little different. It applies to real estate in most states. Sometimes they apply to individuals but not companies, and vice-versa. In many states the limits were raised so high in the 80’s that they don’t have much bearing today.
As was pointed out, they apply to the rate the borrower is paying, not what the seller receives, which is why it rarely affects a “secondary” buyer like those in the discounted mortgage market. It can affect a secondary buyer if the note was “usurious” when it was created.
Phil,
This is what I have run into as a note broker. Every state is different. For example I have recently closed a deal in Virgina and the maximum owner financed rate you are suppossed to legally charge is 12%. The strange thing is the lending side does not have that regualation in that state and can charge a higher rate. I also have closed deals in Minnesota where the rate changes each month. 3 months ago it was a max of 12.48 % this month it is a max of 12.36%. The fact is the title companies won’t give you a title policy if you try to write it higher.
Here’s a statement I found at the Department of Finance of my state. Residential real estate loans are not exempt in my state…again, I suspect all states are different.
“State ex rel. Crist v. Nationwide Financial Corp., 588 S.W.2d8 (Mo. App. 1979). “Real estate loans,” excepted from usury limitations, are those loans whose purpose is the purchase of nonresidential or nonagricultural real estate, and not simply a loan secured by real estate. Also, the commissioner of finance has standing to bring suit as a private realtor to prevent violation of a law which he is entrusted to enforce.”
Frankly I’m no expert on usury. But my understanding is that this is a law that definitely varies by state. Perhaps in your state owner finance deals are exempt. In my state, it’s a rate that used to be published in one the monthly real estate magazines for Realtors. I don’t know if it still is because I haven’t seen the magazine in the last few years. But here, as I understand it, it’s a rate thats determined quarterly by the director of finance by taking the monthly long term US Bond rate of 2 months prior to the beginning of the quarter, and then adding 3%. On this basis, all of the subprime loans are in violation. Of course, there’s probably a clause someplace that permits them to charge higher rates.
I’d look it up at findlaw.com for your state. In my state as an example, a violation of the usury law can result in paying 2X the amount of interest collected to the borrower as a penalty.
Complicated area. In fact, I’m going to revisit this issue with my attorney Monday AM…because I find my knowledge sorely lacking.