Note Info

The US Mortgage Market

2009 was a monumental year for the United States mortgage market. The writing had been on the wall, but it seemed overnight the world came to the realization that housing prices in the US would not increase indefinitely. Since 2009 tens of billions of dollars have been lost in mortgage investments, company after company has been forced out of business and the effects are still being felt.

Without notice mortgage originators have stopped creating sub-prime loans and this large group of buyers/borrowers is now left with nowhere to secure financing. Today, there is a staggering number of potential real estate buyers who can only look to the property seller for the financing they need. While this seemingly simple step of financing the buyer may seem like a good idea, we recommend you learn some fundamental elements of the business before becoming a mortgage lender.

• The demand for owner financing has increased significantly since 2009 and will continue to climb as more borrowers find they don't qualify for conventional financing.
• Offering owner financing to potential buyers is a more powerful marketing tool now than ever before.
• For the reasons addressed above, the ability to sell sub-prime owner financed loans has been greatly reduced or eliminated altogether.
• Offering owner financing will help you sell your property, but doing business with the wrong borrower(s) could potentially lead to larger problems for you than the unsold property was causing.

Owner Financing Advantages for the Seller

• The number of potential buyers will increase significantly.
• The sale price should not have to be reduced below market value.
• The sale will close more quickly than with bank financing.
• Any potential income tax liability from the sale may be able to be deferred.
• In most cases, the note you create can be sold and converted into cash at any time.

Creating A Quality Mortgage Note or Deed of Trust

Of course, creating a high quality note and mortgage or deed of trust is of primary importance. We strongly suggest employing the services of a competent attorney to represent your interests in the sale and creation of the note and mortgage or deed of trust. If you decide to finance the purchaser, you should negotiate the best possible terms and make sure your attorney drafts the documents. Here are some important tips and advice:

Sale Price

The sale price should be nothing less than the properties fair market value. There is no reason to discount the price if you are financing the purchaser. Don’t allow the sale price to be negotiated below market value – and then have the buyer ask you for owner financing.

Down Payment

The down payment is the purchaser’s initial investment in the property. The larger the down payment, the more motivated the purchaser will be to protect his investment. Consider carefully: Would it be wise to sell your property to a buyer who is unwilling or unable to financially commit himself to the property you are selling.

Interest Rate

The interest rate you charge should be a function of the down payment, credit worthiness of the buyer and number of scheduled payments. The rate should be higher than the interest rates being charged by banks. Remember, the banks only advertise their best rates, and the buyer probably doesn’t qualify for them. Don’t be afraid to require at least 2% higher than local banks are charging.

Credit Worthiness

Banks are professional lenders. They don’t lend money without reviewing a credit report on the borrower and you shouldn’t either. Just like any creditor, you have the right to information that shows the buyer has an adequate source of income to pay the note obligation and has a good credit history. If selling to a person with less than good credit insist on a larger down payment.

Amortization

The amortization of a note refers to how many payments are scheduled. For most private note holders it doesn’t make sense to create a note with a 30-year payback. Creating a term up to 15 years is more practical. Scheduling a balloon payment will allow you to shorten the term of the note without increasing the monthly payment required of the buyer.

Escrow Payments

Banks require monthly escrow payments for good reasons. It would be wise for you to require the buyer to make monthly escrow payments for taxes and insurance as well. While requiring more work, it will help prevent the undesirable situation where the tax and insurance payments are not being made.

Title Insurance

As the lender in seller financing, you should require the purchaser / borrower to provide you with a lender’s policy of title insurance. Every bank requires this. If you ever decide to sell your note you will need this policy of title insurance. Requiring the buyer to purchase the policy will save you the expense down the road.

Closing the Sale

It is very important that you have a competent attorney or title company represent your interests in the creation of documents and at the closing. As the seller, the financing documents protect your interests. Your attorney should prepare these documents. After the closing, be sure your new mortgage, deed of trust, contract for deed or land contract is recorded immediately to protect your interests.