This article is intended for educational purposes only and not as legal advise
November 17, 2015
TRID is not applicable to a lender making 5 or fewer mortgages in a year. 12 CFR 1026.2(a)(17)(v). So, there is no federal legal hurdle to over-come in making loans to family members and others as long as you stay within the 5 loan annual limit. However, Colorado law is much more restrictive.
Colorado enacted the Mortgage Loan Originator’s Act in 2008 pursuant to the the Housing and Economic Recovery Act, which established minimum licensing standards for mortgage loan originators. Furthermore, the S.A.F.E. Act mandated states to adopt such standards. Colorado has an exemption for seller carry-back financing of up to three properties in a 12-month period, see C.R.S. 12-61-905, but there is no exemption when the mortgagee (lender) is not the seller unless it’s originated by a licensed MLO along with other conditions. C.R.S. 12-61-910 states that violations of the Colorado law is a Class 1 Misdemeanor and subject to a $5,000 fine. However, it does state in Section 4 that violations of the act do not affect the priority or enforceability of the mortgage/deed of trust.
So, if you wish to assist your children or anyone else in Colorado when they’re buying a home by providing all or part of the financing, here’s what I would recommend. Buy the home and title it either solely in your name(s) or consider joint tenancy if it’s with your child. Then, enter into a 6 month lease/option agreement providing for an option to purchase your interest which clearly spells out the requirements to exercise the option including the terms of the owner carry financing.
Be aware that if you go the joint tenancy route, any judgments, liens and other possible adverse matters may come of record against the other joint tenant and attach to the real property title during the time of your dual ownership. If your goal is to be in first position at the time you sell and attach your secured lien, it may be advisable to buy solely in your name(s) and wait to convey title until the option is exercised so you can record your deed of trust right after the deed.