Mortgage Note Buyer • Deed of Trust Buyer • Land Contract Buyer • Trust Deed Buyer • Contract for Deed Buyer
2007 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 2007 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.
Knowing how to successfully use owner financing is extremely important. Learning these guidelines will limit whom you offer owner financing to, help you sell your note if you desire to do so and hopefully, reduce the chance of facing a foreclosure situation down the road.
If you follow these guidelines you will have the option of selling the new mortgage loan you created within a few months of the closing. That way, if you really desired cash from the sale you can still have it. Failing to follow these guidelines may result in you creating a note that is not marketable or one that will have to be deeply discounted in order to sell.
Owner financing is a sensible way to sell property and extremely common all over the United States. (It has been estimated that approximately 10% to 15% of property sold is now sold with seller financing.) Offering to finance the purchaser of your property can help you sell it quickly, may provide tax benefits and will give you a nice source of monthly income.
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:
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. Donít allow the sale price to be negotiated below market value Ė and then have the buyer ask you for owner financing.
The down payment is the purchaserís 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.
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 doesnít qualify for them. Donít be afraid to require at least 1% to 2% higher than local banks are charging.
Banks are professional lenders. They donít lend money without reviewing a credit report on the borrower and you shouldnít 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.
The amortization of a note refers to how many payments are scheduled. For most private note holders it doesnít 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.
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.
As the lender in seller financing, you should require the purchaser / borrower to provide you with a lenderís 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.
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.
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