Selling With Owner Financing in Oklahoma

You own the house outright, the buyer cannot get a mortgage, and carrying the finance yourself would get the sale done and produce an income. It is a legitimate and sometimes excellent arrangement. It is also one where federal rules apply to you personally, in ways most sellers have never heard of, and where the structure you choose decides what happens if it goes wrong.

This article covers the difference between doing it properly and doing it the way that traps people, the federal rule that can make a private seller a loan originator, the two exclusions, and the practical terms that matter.

Note and mortgage, not contract for deed

Start with the structural decision, because it matters more than the interest rate.

The safer structure is that you convey the deed at closing and take back a promissory note secured by a mortgage recorded against the property. The buyer owns the house. You are a lienholder. If they default, you foreclose, which is a known process with known rules.

The other structure is a contract for deed, where you keep legal title until the last payment. Sellers prefer the sound of it and Oklahoma law does not cooperate. Under title 16, section 11A, a contract for deed is deemed a mortgage anyway, so you cannot evict, you must foreclose, and an unrecorded contract cannot be foreclosed until it is recorded and mortgage tax paid on it. Our article on contract for deed and rent to own in Oklahoma covers that in full.

You end up in the same place either way. One route gets there with a clean recorded lien and the other gets there after an argument about what you actually hold.

The federal rule that catches private sellers

This is the part that surprises people, and it applies to you as an individual selling one house.

Under the Consumer Financial Protection Bureau's Loan Originator Rule, in Regulation Z at 12 CFR 1026.36 and effective since 10 January 2014, somebody who offers or negotiates the terms of a residential mortgage loan is treated as a loan originator unless an exclusion applies. A seller carrying back financing on a house is doing exactly that.

It applies where the property is a dwelling of one to four units and the buyer is a consumer intending to occupy it. It does not reach the sale of bare lots, commercial property, or investment and rental property, and it does not reach a buyer who is not going to live there.

The two exclusions

The one-property exclusion. A natural person, estate or trust who provides seller financing for only one property in any twelve month period. Notably, this exclusion does not require you to determine the buyer's ability to repay.

The three-property exclusion. Any seller, including a company, financing three or fewer properties in any twelve month period. This one does require you to determine in good faith that the buyer has a reasonable ability to repay.

One practical difference worth knowing: an LLC, corporation or partnership cannot use the one-property exclusion, but can use the three-property one.

Both exclusions carry further conditions. You must own the property securing the financing, and you must not have constructed it or acted as a contractor in its construction. There are restrictions on negative amortisation and on rate adjustments, with an adjustable rate needing to be fixed for at least five years before it resets, subject to reasonable annual and lifetime limits.

The exclusions also restrict balloon payments, and the detail differs between them. We are not going to state it precisely, because the sources we could verify do not agree on the point, and it is exactly the sort of detail that decides whether your structure is compliant. Ask your attorney about balloons specifically.

Beyond the federal rule, state licensing under the SAFE Act framework is a separate question. Confirm Oklahoma's position rather than assuming the federal exclusion covers everything.

The terms that actually matter

Assuming the structure is right, these are the decisions that determine whether this is a good arrangement or a slow problem.

• The deposit. The single best predictor of whether a buyer keeps paying is how much of their own money is in the house. A thin deposit is the risk, not the interest rate
• Who holds the insurance and pays the taxes, and how you will know they are being paid. Requiring proof annually is normal and it protects your security
• Escrow for taxes and insurance, or at minimum a mechanism that tells you before a tax problem becomes a lien ahead of yours
• Servicing. A third-party servicer collects, applies payments correctly, issues statements and produces the records you will need. On a long note it is worth the fee
• Late fees, default terms and cure periods, written clearly
• Recording the mortgage immediately. An unrecorded lien is a lien nobody can see

Our article on what a title company does before closing covers the closing itself, which happens in the ordinary way with the mortgage recorded as part of it.

The honest risk assessment

You are becoming a lender to somebody the lending industry declined. Sometimes that is because the industry is rigid and the person is sound: self-employed income, a recent divorce, a credit event several years old. Sometimes it is because they cannot afford the house.

The difference between those two is most of the outcome, and it is worth doing the work to tell them apart even where the one-property exclusion does not require you to.

Understand also what default means for you. Foreclosure takes months and costs money. The house comes back in the condition somebody who stopped paying left it in. Meanwhile you have had no payments. If that sequence would be a genuine problem for your finances, this is not the right arrangement for you regardless of the interest rate.

Where we come in

If you can afford to wait for the money and you want the income, carrying the finance can beat everything else on this page, including us. A well-structured note at a fair rate produces a monthly return on an asset you would otherwise convert to cash, and it widens your buyer pool considerably. We would rather tell you that than not.

It is the wrong arrangement when you need the money now, when you would struggle to fund a foreclosure, when you are not going to keep records for the next fifteen years, or when the reason you are selling is that you want the property out of your life. Carrying paper is not getting out of the property. It is a different relationship with it.

That is the case where a cash sale fits: a clean end rather than a longer connection. Our page comparing a cash offer against listing with an agent has the arithmetic for the ordinary routes, and our article on financing land-heavy property covers the case where seller financing is common because ordinary lending is difficult.

The short version

• Convey the deed and take back a note secured by a recorded mortgage. Do not use a contract for deed, which Oklahoma deems a mortgage anyway under 16 O.S. 11A
• Under the CFPB Loan Originator Rule, 12 CFR 1026.36, a seller carrying financing is a loan originator unless an exclusion applies
• It reaches one to four unit dwellings bought by a consumer to occupy, not lots, commercial or investment property
• One-property exclusion: a natural person, estate or trust, one property in twelve months, no ability-to-repay determination required
• Three-property exclusion: any seller entity, three or fewer, and a good-faith ability-to-repay determination IS required
• An LLC cannot use the one-property exclusion but can use the three-property one
• Both restrict negative amortisation, rate adjustments and balloons. Ask an attorney about balloons specifically
• The deposit predicts performance better than the interest rate does
• Carrying paper is not getting out of the property