Texas seller financing regulations

Ability-to-repay applies to most seller-finance loans

The federal ability-to-repay rule at 12 CFR §1026.43 requires a lender on a consumer-purpose residential mortgage to make a reasonable, good-faith determination that the borrower can repay according to the terms. The lender considers income, employment, monthly mortgage payment, taxes and insurance, debt-to-income ratio, and reserves; the lender verifies with third-party records. The rule applies to seller-financers exactly as it applies to bank originators, with limited exceptions.

The qualified mortgage safe harbor at §1026.43(e) gives the lender a stronger defense against an ATR challenge. Most seller-finance loans do not fit the QM definition (especially the small-creditor balloon QM rules); they sit in the broader ATR analysis. Document the income verification, the DTI computation, and the reserves. Keep the file.

Business-purpose loans (an investor purchase of a non-owner-occupied rental property) are outside the ATR rule. The line between consumer-purpose and business-purpose is fact-specific and turns on the borrower’s intended use of the property, not the lender’s assumption.

The federal three-property exemption is federal-only

The most-discussed Texas private-lender exemption is the federal three-property exemption at 12 CFR §1026.36(a)(4): a natural person, estate, or trust that finances up to three property sales in a 12-month period to consumers, did not construct the dwelling, provides reasonable financing without a balloon, and documents ability-to-repay, is exempt from federal loan-originator licensing. The exemption is narrow and federal-only.

The Texas RMLO licensing analysis under Tex. Finance Code Chapter 180 is separate. Texas §180.003 exemptions overlap with the federal exemption but do not perfectly match. A Texas private lender relying solely on the federal three-property exemption without confirming a Texas exemption is exposed. The decision-tree analysis sits on our RMLO requirements page.

The SB 43 wrap overlay

If your seller-finance loan is structured as a wraparound (a new note that wraps around an existing senior mortgage held in the seller’s name), Tex. Finance Code Chapter 159 adds an overlay regardless of how the federal exemption analysis goes. Most residential wrap originators must hold an active RMLO license; the wrap-borrower must receive specific written disclosures; the senior lienholder must receive notice in many cases.

Contracts for deed have their own borrower-protection regime

If your seller-finance structure is a contract for deed (executory contract), the rules under Tex. Property Code §5.061 and following apply. The borrower must receive specific disclosures from the seller before signing (§5.069), retains a cure right on default with notice and an opportunity to cure within a statutory window, and has a §5.081 right to convert the contract to a deed of trust at any time. Default handling proceeds under §5.063 and following, not §51.002.

Through 2024, the CFPB showed interest in contract-for-deed arrangements at the federal level, including advisory opinions characterizing some contracts for deed as covered residential mortgage transactions for federal purposes. The Texas regime overlays the federal regime; both apply.

Where Moat sits

Moat Note Servicing is a Texas-licensed mortgage servicer (NMLS 1419346), not an originator. We administer existing Texas seller-finance notes after closing: payment processing, escrow, statements, default and foreclosure work, and trustee coordination. The origination decisions and licensing analyses above sit with the lender and the RMLO at closing. We service deed-of-trust notes and contracts for deed; wraparound mortgages are case-by-case under SB 43 / Chapter 159.