If You Are Considering Owner Financing The Sale Of A Home? Then You Must Read This
As a mortgage buyer, buying private owner financed mortgage notes I continue to be amazed at not only the terms of many owner financed notes but the pretty lax way they were allowed to be created. And while I do understand how a desperate home (or commercial property) seller could easily fall into the ‘anything just to sell home now‘ trap, many of these tips won’t effect the sale but will still help protect your newly created financial asset – the private mortgage note.
Below are some basic steps you may want to consider taking when owner financing to 1) Create a more valuable and marketable mortgage note, should you ever need to sell the note and 2) Better protect yourself from future losses and/or irritations.
1. Require at least a 10% down payment, even if it has to be in 2 or three installments. A buyer with no “skin in the game”, as seen by the default rate on 100% traditional mortgages is a much more serious risk than one with significant money on the line.
2. Pull credit on the borrower. If you aren’t able to pull credit yourself, require the borrower to provide you with a credit report from all 3 bureaus with scores. Keep a copy of the report, particularly if you plan on selling the note in the near future. Even if you don’t turn a buyer down because of poor credit because you really need to sell, you can often use the poor credit to get a better interest rate. And don’t forget, there may be legitimate reasons for the poor credit such as a job loss or illness. Did you know that medical bills are the number one driver of Bankruptcies in this country? Even people with good income can be wiped out if they have no insurance. I’ve seen many people with health insurance take a serious hit in credit scores due to their insurance company dragging out payments.
3. Use a good attorney or title company to close the deal and be sure the note allows you to both sell a note and pull credit in the future. Someone approached me the other day to sell a note, only to discover the note had a “non transfer” clause. You control this process. Be sure it goes in your favor.
By following these steps when owner financing a home or commercial property sale, you significantly reduce your chances of a loss down the road.