Mortgage Note Discounting
Many note holders ask just what the biggest factor is for mortgage buyers in discounting a note. While there can be some extreme cases, the main factors in order of effect on the discount on a note are as follows.
- Very poor credit or pay history of the borrower. Oftentimes you may not even get a quote from mortgage buyers if this is too bad.
- A lengthy amortization period. 30 year (or longer, yes I’ve seen a 50 year amortization period) results in a significantly higher discount due to the time period. Think of note discounting as the reverse of compound interest. If you must amortize over 20 years to get the payment acceptable to your buyer, set a balloon date of five to seven years. The balloon date also incents your buyer to ‘get their house in order’ and refinance.
- Low interest rate. I have sellers all the time tell me that they have a great note when the interest rate is 5% since current conventional mortgage rates are in the 3 percent range. Unfortunately, those are apples and oranges as there was almost always no Underwriting by the seller. Think of owner financed notes as the “new sub-prime loans” for the post collapse of the mortgage and real estate markets.
There you have it, the most important factors for note discounting. If you have any questions about selling a mortgage note, don’t hesitate to call us at 1-877-655-5625. Ask for Ron.