Taking back a seller-financed mortgage?
How to make sure you get the highest price for your note if you may wish to
sell it.
- Buyer's credit.
The better the credit rating of the buyers, the more valuable your note.
- If they are a husband and wife, find out the credit rating of both of
them. many time the wife is earning more than the husband.
- If you don't have a credit report, you can
order a credit report from us.
- Sale price of real estate.
If this is MORE than the actual value of the real estate expect to take a
bigger discount when you sell the note. An experienced note buyer wants to
have some equity in the property in case the buyer defaults.
- Third party buyer.
If you sell to a family member or friend you WILL have difficulty collecting
your payments.
- Actual, provable value of the real estate.
If you are taking back a first mortgage note there is no legal reason to have an appraisal.
But if you intend to SELL the note, any experienced note buyer will
want to know what the property is worth. It may be harder to access the
property and have an appraisal done after you close on the sale. See our article
on
mortgage fraud. Also our article on unusual clauses to include when you
take
back a mortgage.
- Loan to Value ratio. LTV.
For a note to be marketable the total LTV, that is including the first and
second mortgage (if any) should be no more than 75% of the actual value of the
property. However, if the buyer's credit is good, this 75% could refer to the
Investment to Value or ITV. In other words, the amount the note buyer is
investing in the note. Thus if the property is worth $100,000 and the buyer
has put down a 10% payment and has a $90,000 mortgage, you could get $75,000
(75% of the value) for your note. See our charts for
safe mortgage lending.
- Who are the buyers?
If the buyers are husband and wife they BOTH need to sign the note. If the
buyer is a corporation, trust or LLC then make sure the principals also
PERSONALLY sign the note. If they refuse to do so this could be an indication
they will let the note default if the deal doesn't work out for them. Of of,
this need not apply if the buyer is a substantial corporation. (I wouldn't ask
Bill Gates to personally sign on a note from Microsoft. :-) But how about a
note from WorldCom or Enron?) If the borrower is NOT a substantial corporation
then the note could be either unsaleable or only saleable at a much larger
discount to reflect the lack of personal liability.
- Seasoning, aging.
There is no doubt that a seasoned note, where the buyers have made payments
for a year or more, is easier to sell and will get a higher price than a new one. But of course you won't
have this option if you want to do a simultaneous closing.
- Institutional lender allows secondary financing.
There are many institutional lenders, banks etc. that will not allow
secondary financing behind their note. Why not? After all, their lien is
senior anyway. One answer is simply that they do not want to the borrower to be
stretched to make their payments. Also they would sooner the buyer put down
more cash or pay for mortgage insurance (a fancy way of saying a higher
interest rate.)
- Loan properly secured.
If your mortgage is a second mortgage, it should be a properly recorded
mortgage or deed of trust to comply with your local laws. Any documentary and
intangible taxes should be paid. Without this the mortgage may be
unenforceable.
- Title insurance.
You should have proper mortgagee's title insurance.
- Rights with respect to first mortgage, if you hold a second.
If you are holding a second mortgage it should contain language to the effect
that a default on the first mortgage is a default on the second. Also that
you, as second mortgage holder have the right to check on the payment status
of the first. We
prefer language that REQUIRES the borrower to mail us proof of payment of
the first mortgage when they mail us the check for their payment on the
second.
- Interest rate.
Other things being equal, the higher the interest rate, the higher the price
you will receive. But be aware of laws concerning Usury and Predatory lending.
A below market interest rate will demand a hefty discount to be saleable. Our
regular news contains data about current
interest rates for conforming mortgage notes.
- Length of note to short.
Typically it is hard to sell a note with a short balloon, or a balloon due in
just 6-12 months. The note buyer will be concerned that the borrower won't be
able to refinance and pay them off.
But a loan with for example, 3-5 years to run, and a 30-year amortization is
going to be saleable, other things being equal.
- Length of note too long.
The note buyer won't usually want to wait 30 years to get paid off, but these
notes can often be sold to institutional note buyers.
Then offer it to competing
note buyers on our web site.
[Introduction] [Improving saleability] [Creating a safe mortgage] [Market your home] [Advertising your home] [A prospect phones] [Hold an Open House] [Real estate contract] [Creating a saleable mortgage note] [Create saleable business note] [Buyers credit] [Committment to pay] [Which is the better deal?] [Mortgage credit ratings] [Owner occupied] [Non owner occupied] [Commercial] [Calculate the payment] [Second mortgages] [Borrowers with bad credit] [Documents to use] [Create your documents] [Minimum documents needed] [Steps before closing] [Seller financing imputed interest] [Unusual mortgage clauses when selling a home] [Wrap around mortgages] [Escrow real estate taxes hazard insurance] [Real estate installment sales] [Mortgage unusual clauses you should have] [IRS publication 523 2003 selling your home]
|
