Let’s set the stage: You decided to sell a mortgage note you carry and the outcome isn’t what you expected. Lets say you’ve grown tired of your mortgage note. You’re done with collecting monthly payments, and you’re ready to cash out now — not five, 10 or 20 years down the line.
Companies that Buy Mortgage Notes
So you reach out to companies that buy mortgage notes. You’re looking to get top-dollar, so maybe you contact two or three more for a quote, just to be safe.
Those quotes come back, and you’re taken aback. They’re not nearly what you were hoping for — not even close. You search high and low, contact every other note buying company you can find, and you still get the same result — a too-low offer that’s almost offensive.
What’s the culprit? Why is your valuable mortgage note worth so little to those buyers? That’d be your borrower’s credit.
How a Borrower’s Credit Score Impacts A Mortgage Note’s Worth
Mortgage note sellers find themselves in this predicament all the time, and here’s why: The majority of note investors base their offers largely (and sometimes entirely) on the credit score of the borrower — the person actually making payments on the note. A good score means a good offer. A poor one? Well, you can guess what follows.
Unfortunately, what a buyer will offer for a mortgage note is highly dependent on the borrower’s credit. And while you might have checked the borrower’s score before you financed their purchase in the first place, their credit could have changed since then, thanks to new debts, missed payments, or even worse, accounts sent to collections.
If your borrower’s credit is poor, it means they can’t refinance either, so you’re stuck between a rock and a hard place: accept a low-ball offer for your note and offload it to a buyer, or keep trucking on, collecting your money in small, monthly increments over the next few years.
A Better Option: Improve Their Credit
Your note might not be worth as much as you had hoped, but offloading it at fire-sale prices isn’t why you got this far. Your note is likely a major part of your retirement plan or future financial moves, and accepting a low-ball offer won’t just hurt your pocketbook — but it could ruin your long-term goals, too.
Instead, consider waiting a year to sell the note. If you can afford to bide the time, there are a few steps you can take to both improve your borrower’s credit score (ethically, of course), as well as increase your note’s value in the eyes of a buyer.
Here’s how to do it:
1. Place the note with a loan servicing company like Madison Management Services (which services loans nationwide) or August REI (only available in Texas and Oklahoma). These loan servicers directly report your borrower’s monthly installment payments to crediting agencies like Equifax, Experian, and TransUnion which, over time, improves their credit score — and eventually, your note’s value. Even if the servicer reports payments to just one agency, it can help.
2. Wait at least a year. Let the servicer report your borrower’s payments for at least 12 months — or longer even, if you can afford to. Assuming they make their payments and don’t default on other debts, it should have a marked effect on the borrower’s credit score. You can run their credit — or ask them to pull their report on your behalf (since consumers get a free credit report annually) — to see what sort of impact the reporting has had.
3. Try to sell your note again. If the borrower’s credit has definitely improved, try to once again sell your note to a note buyer. You’ll likely see an increased offer and more profits from the sale. You can also allow the borrower to refinance with another lender if that’s what they’d prefer to do. Now that their credit score is better, refinancing may be a way for them to lower their monthly costs and improve their payment terms.
A word of warning: Placing your note with a servicer will cost a bit (anywhere from $20 to $35 per month), but it will have a direct impact on your borrower’s credit and your loan’s value. Generally though, those costs pale in comparison to what you stand to gain in an increased note value. Even the highest-level servicing plan (with taxes, escrow, etc. collected) will run you $420 for a year. If that year nudges your borrower’s credit score up 20-40 points, you could get thousands — even tens of thousands — more for the note upon sale. It’s clearly the more profitable deal in the long run.
Structure a Mortgage Note Right from the Start
Ultimately, the best plan is always a proactive one. If selling off your note is anywhere in your strategic roadmap, then make sure to structure it from the very beginning with note investors in mind.
There are certain things that can be done when you want to create a valuable mortgage note and including these in the initial structure of your arrangement can improve your chances of selling real estate notes at a premium price point. If you’re going to create a mortgage note for resale, you can:
Require a higher down payment –
Note buyers generally like to see a down payment of 15 percent or higher.
A good credit score –
Make sure to vet your borrower and run a full credit check before financing their sale. A score of 676 or higher is ideal.
Create a shorter-term loan –
Most buyers steer clear of loans longer than 10-15 years.
Get a lenders title policy –
This an insurance policy protecting lien interest which protects value of note
Avoid interest-only structures –
These offer less profit for buyers.
Up your interest rate –
It should be 2 to 5 percent higher than the going market rate.
Include a personal guarantee –
This is very important is the borrower is a corporate entity.
The loan servicer you decided to use will keep detailed payment records on file. This should include copies of checks, proof of payments received, proof of bank transfers, etc. The easier it is to prove your borrower makes on-time payments, the better it looks to mortgage note buyers.