How much money will I receive when I create and sell my mortgage note?
A question that we hear consistently throughout operations within the secondary mortgage market is… How much money will I get when I create and sell my mortgage note?
There are many different variables that a mortgage note buyer must consider in order to properly evaluate the purchase of a mortgage note for sale on the secondary note market. It is all about managing risk for the note buyer. The average mortgage note, assuming it is in the first position and assuming that it is performing, will sell between $0.65 on the dollar and $0.90 of the current unpaid principal balance owed at the time of the mortgage note sale.
In order to ensure that a note seller will receive the most money for a mortgage note when it goes up for sale, one must follow these simple guidelines:
Down Payment – This is usually the first item that any (reputable & experienced) mortgage note buyer would review when pricing a mortgage note for purchase. The fact of the matter is that the more money a note seller receives as a down payment from the borrower (the person purchasing the property), the more money the note will sell for when the seller attempts to sell a mortgage note to a mortgage note buyer. Collecting a zero down payment (or no money down) is a very risky proposition which could leave the note seller stuck with the mortgage note they were planning to sell to a mortgage note buyer. Collect the most money possible when creating a seller-financed note that you are planning on selling to a mortgage note buyer – plain and simple!
Credit Score of the Borrower – This is the second item a mortgage note buyer would review when pricing a mortgage note for purchase on the open market. The higher the credit score of the borrower, the more money the note would sell for when being assigned to a mortgage note investor. Many would assume that if the borrower (the person purchasing the property) would probably not have good credit if they are utilizing seller financing, which is why they did not borrow their money from a bank in the first place – right? This is somewhat true, although in this economy, many good-credit borrowers are being turned down for loans due to debt to income ratios not being met within most bank’s loan-criteria. It is suggested to allow yourself the time to pull a borrower credit report and review credit scores of the borrowers utilizing private companies that will pull credit for you such as: Kroll Factual Data or one of the three major credit bureaus – Transunion, Experian or Equifax.
Loan Structure – The third item any mortgage note buyer would consider when one attempts to sell a mortgage note would be the loan terms, amortization, balloon payments, interest rate and recourse on the loan itself:
1. Loan Amortization: The shorter the pay-back period, the more money the mortgage note will sell for when assigned to a mortgage note investor. BE ADVISED – Balloon payments are the kiss of death when trying to sell a mortgage note… Stay far, far away from balloon payments – period!
2. Interest Rate: The interest rate should reflect the risk that the note seller is taking by seller-financing the mortgage note sale in the first place. The higher the interest rate, the more money the note will sell for – plain and simple. It would be suggested to keep the interest rate in the high single digits to low double digits (no higher than 12% will suffice in order to receive top dollar when you sell a mortgage note). With all due respect to the note borrower, if they want a 5% interest rate (or lower), they need to go to a bank and borrower money. Banks can afford it, private sellers cannot.
3. Recourse/Personal Guarantee from Borrower: What is recourse and/or a personal guarantee? A personal guarantee is exactly as it sounds – a entity such as a business, government agency, family trust, or anything that is not a private individual would need to sign a document stating they they are personally liable for any missed payments or default within the contract (mortgage note) that is put into place. If you do not get a personal guarantee when creating a note, this could mean the difference of tens of thousands of dollars LESS in your pocket. It is that important. It could be the difference of selling the mortgage note or not selling the mortgage note.
Following these basic guidelines should allow a note seller to get on the right track to receiving the most money for their mortgage note.