If a seller holds a mortgage on the sale in Florida how much interest can they charge?
So this comes up every once in a while. The Buyer asks the the Seller to ‘hold paper’ or to hold a mortgage on the sale of the property? The Seller, assuming they have the equity in the property to do this, think: This is great! Sure I’ll hold a mortgage but I charge 25% interest.
When considering a loan such as this in Florida, it is important to consider the statutory rules, called Usury Laws, that govern this type of lending. Even though the Seller never actually hands the Buyer a check or other liquid funds this is none the less a loan. The Buyer will execute a promissory note and an accompanying mortgage. The note is the loan or IOU for the money lent. The mortgage is the pledging of the property as collateral for this loan along with what are called covenants to do things like maintain and insure the property. We will focus on the terms of the note.
The plain language of F.S. §687.03 indicates that it constitutes usury for any person to willfully “reserve, charge, or take” a sum of money equivalent to a rate of interest greater than 18 percent.
In Florida, the law states that the maximum interest rate for a loan with a principal amount of $500,000 or lower is 18%. For a loan with a principal amount of over $500,000, the maximum interest rate is 25%. It is, however, possible for the borrower to waive their protection provided by the usury laws. These maximum interest rates apply to loans between individuals or corporations, and not to banks.
So, let’s say the property is to be sold for 450k and the Buyer has 50k (after closing costs) to use as equity. The Buyer thus needs to borrow 400k which is what is stated on the note. The maximum interest rate on the note is 18%. If the net amount on the note were to be above 500k then the maximum interest rate would be 25%.
PLEASE, PLEASE, PLEASE speak to a lawyer before even laying out the terms to a prospective Buyer as any early termination or up front points charged may come into consideration.
