SELLER FINANCING UNDER THE TRUTH IN LENDING ACT

DETERMINING IF THE RESTRICTIONS ON SELLER FINANCING APPLY TO YOUR TRANSACTION

Regulation Z was issued to implement the federal Truth in Lending Act (TILA).  Generally, Regulation Z applies to consumer credit transactions secured by a dwelling; however there are exemptions to this general rule (see below).  A “dwelling” is defined as a residential structure that contains one to four units, whether or not that structure is attached to real property.  The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. The following transactions are EXEMPT from Regulation Z...

SELLER FINANCING

INSTRUMENTS

Seller financing can be accomplished through various instruments: 

  • Mortgage and Promissory Note

  • Deed of Trust and Promissory Note...

  • Real Estate Contract (“REC”)

REAL ESTATE 

CONTRACTS (RECs)

In the case of an REC, the most common seller financing instrument used in New Mexico, the seller transfers equitable interest in the property to the buyer upon execution of the REC, while the seller retains legal title to the property until the buyer satisfies all conditions of the REC. However, under long-established New Mexico case law, the buyer is, for all intent and purposes, the “owner” of the property; the seller is considered the trustee and has the right to receive payments for the property...

IMPORTANCE OF 

TITLE INSURANCE

When buying real estate, it important to confirm the seller owns the property and to know what, if any, liens are attached to the real estate. This can be accomplished by conducting a title search.  Additionally, the buyer may wish to purchase title insurance which may protect the buyer from financial loss due to defects in a title to a property. In the case of an REC...

ROLE OF THE

ESCROW COMPANY

With an REC, a General Warranty Deed conveying legal title to the buyer (in the event the buyer satisfies the terms of the REC) and a Special Warranty Deed conveying the property back to the seller (in the event of buyer’s default) is deposited with the escrow agent to be held until either the buyer satisfies all conditions of the REC or the buyer defaults. This is important because the buyer or seller may not be available when one of these events should occur, and...

DEFAULT UNDER

AN REC

Generally, if a buyer defaults under an REC, the seller will send the buyer a Default Notice which specifies the default and explains how the buyer can cure the default and the time frame for doing so. Most commonly, the buyer is given 30 days to cure the default, but this time-frame is a negotiable term of the REC...