Common Concerns About a Mortgage Note Sale
Why are individuals or entities like note buyers interested in buying a mortgage note as an investment, and what are the major risks involved? To understand this, we must understand what a mortgage note is.
What Is a Mortgage Note?
A mortgage note is a written agreement between a property seller and the property’s buyer that specifies that the buyer will pay off the mortgage the note secures. Like real estate itself, a mortgage note can be bought and sold. The buyer of a mortgage note is typically an institutional investor or a private investor that has experience with the note-buying process. The seller is often a private individual, but could also be a company that holds the note as an asset.
If you have a mortgage and are considering a mortgage note sale, it pays to arm yourself with all the information needed to make an educated decision. Read through our tips that answer some common concerns for first-time mortgage note sellers.
By the end of this read, you will be aware of the following:
- Professional loan acquisition specialists will get you the best return on your mortgage notes.
- A mortgage note can be evaluated based on down payments, credit scores, amortization, and payment history.
- The sale process takes place in 12 simple steps.
- Selling the entire note provides you with a large sum of cash with no responsibility regarding the performance of the mortgage, while partial selling provides a steady income for a period of time.
- The best time to sell a mortgage note is when you require a large sum of money for a venture or startup.
- Loan amortization: The process of paying off your debt over a fixed period of time in equal installments.
- Broker price opinion (BPO): Receiving a professional’s opinion on the valuation of a property.
- Bullish real estate market: A market where the prices are either rising or are expected to rise.
How and where do I start the sale?
You can start by searching for investors who would make an offer in keeping with the fair market value of your mortgage note. While you may choose any buyer you want, you’re likely to get the best return by using the services of a professional loan acquisition specialist that understands the ins and outs of a mortgage note sale from the perspective of the note seller.
How is the note’s value determined?
Many factors potentially determine the fair market value of a mortgage note, but some factors are almost always considered, regardless of the investor. The following five considerations primarily determine the value of a mortgage note sale.
1. Down Payment
The larger the down payment you receive on the mortgage, the lower the remaining loan amount the buyer must pay. Since collecting large loans in full is generally harder than collecting smaller loans. Statistics show that in the early months of the Covid-19 pandemic, the U.S. 30-day mortgage delinquency rates (meaning mortgage payments overdue by more than 30 days) spiked to an unbelievable 8.22%. That number has come down steadily since then, to a low of 3.45% by the end of 2022, but risks like this are why buyers are attracted to notes with high down payments.
2. Borrower Credit Score
As poor credit scores commonly result from a history of not making timely payments, buyers are inherently more attracted to a mortgage note for a property whose occupant has a decent credit history. Credit history predicts future financial activity — and buyers are aware.
3. Loan Terms / Amortization
Here, we are talking about evaluating the interest rate for the mortgage, the loan amortization (i.e., the payback schedule), and balloon payments. Higher interest rates generate higher sale prices for mortgage notes, while a long payback period generally results in lower offers. Regarding balloon payments (that is, the repayment of the entire outstanding at the end of the mortgage term) the Dodd-Frank Wall Street Reform Act recommends avoiding them. However, investors — including us — still buy mortgages that have them, since the payments don’t significantly affect initial pricing.
4. Personal Guarantee
This factor matters only if you sell your property to a private corporation (i.e., private S-Corp, C-Corp, LLC, LP, or Trust) that isn’t traded on the stock market. A principal of the company writes a personal guarantee that legally binds the person to keep making loan payments on the property, even if company brass determines that payments are longer affordable.
5. Loan Payment History
The occupant’s credit score can be used to statistically predict the likelihood of receiving loan payments on schedule. However, it’s the actual payment history that tells the story. For the seller to get the biggest return on a note, at least 6-12 payments must be received. Receiving more than 12 payments only helps make the note more attractive.
Moreover, the less financial risk a note poses to a buyer, the higher its market value will be. This is why the factors above play an important role in establishing the value of a mortgage note. In terms of loan payment history, they also point to the fact that the time at which you sell the note can make a difference in value. Selling after a good payment history is established is ideal.
How does the sale take place?
The terms of a mortgage note sale differ between investors, but we can give you the specifics of our own acquisition process, which involves the following 12 steps that end in the sale.
1. Receive a Quote
As mentioned above, the first step is to make preliminary calls to prospective buyers. Now that you understand what determines a note’s value, you can evaluate quotes with greater confidence.
2. Accept the Offer
When you agree to an offer, you’ll accept it as a full mortgage purchase or a partial mortgage purchase. The difference between these sale options is discussed in detail below.
3. Submit Documents
More documents are submitted later, but you start by providing the buyer with the following documents, depending on your state: a copy of the note and deed, and the land contract or mortgage.
4. Verify Asset / Collateral
Next, the buyer performs asset/collateral verification, confirming borrower credit, estimated property value, and the note’s loan-to-value ratio (the percentage of the property’s value that the note represents).
5. Submit Documents
After the note is pre-confirmed, it’s time to submit additional documents for underwriting. You can find a list of the nine documents needed by visiting our page about the note-buying process.
6. Review and Sign
After the buyer evaluates the documents, you’re provided with a note purchase agreement and a seller checklist that you review for accuracy, sign, and then return them to the seller.
7. BPO or Appraisal
Depending on the type of property and its geographical location, the buyer orders and pays for a broker price opinion (BPO) or an appraisal of the mortgage to help establish its value.
8. BPO / Appraisal Review
When the buyer receives the BPO or appraisal review, they can examine the documents for accuracy and special considerations that may have impacted the BPO or appraisal.
9. Title Search
Now, the buyer requests and pays for a title search to determine whether the property title is fit for sale, including whether the title has any liens and is legitimately owned by the note holder.
10. Title Approval
After the title comes back “clean” and is judged fit to purchase, the seller begins the process of clearing the note for closing. Now, all you need to do is wait to receive the closing date.
11. Schedule Closing
The buyer sets a date for closing the sale on the note, setting the time of day for the sale in addition to designating a date. The sale can be closed through UPS or FedEx if you desire.
12. Receive Payment
After the mortgage note sale is complete on the buyer’s end, you are paid for the note by check or wire transfer. After the money clears your account, it’s yours to do with as you please.
The process above may seem a bit complicated to first-time note sellers, but most of the detail work surrounding the sale is performed by the buyer. As long as the buyer wants your note, you are able to provide the necessary documents for the sale, and the mortgage title is “clean,” your mortgage note sale should proceed smoothly through the 12 steps listed above.
Do I have to sell the entire note?
As mentioned, you can sell a note in part or in full. Because many sellers are unfamiliar with this option, we’ll explain the benefits and drawbacks to both choices.
Should you sell the entire note, you walk away with money in hand and no responsibility for how the mortgage performs from that point on. This is a good option for sellers who need a large sum of money quickly and/or wish to avoid the potential financial hassles of owning the note. The caveat is that the note is sold at a discount, as the buyer assumes the mortgage-associated risks you once did.
If you sell a part of the note, both you and the buyer collect income from future mortgage payments on the property. The downside is that you receive a smaller lump sum payment than you would if you sold the entire note. The upside is that you still receive payments — albeit, of a lesser amount — on the property, and the note is sold for a smaller discount. You and the buyer share the financial risks associated with the long-term performance of the mortgage.
In the long run, a partial sale typically yields the biggest return. This type of sale is a good option for sellers who wish to maintain a stream of income from the mortgage to cover recurring expenses, such as maintenance on a new property, but need a moderate, lump-sum payment to cover a debt or purchase of some kind.
When is selling the right decision?
A mortgage note sale is typically executed because the seller wants a large, lump sum of cash to invest in a different financial venture, or needs a large amount of cash for some other reason. Consequently, the first step in deciding whether selling is the right decision is projecting whether liquidating the note is better financially than retaining it. For many sellers, the following situations make selling real estate notes the optimal choice.
Chance to Make Lucrative Investments
If an investment comes along that’s more lucrative than owning your mortgage note, now may be the time to sell the note and put the proceeds in this new financial vehicle. There are no limits on the type of investment you can make, but before you put your funds somewhere else, it’s a good idea to sit down with an investment planner and explore your options.
Chance to Significantly Reduce Debt
Nothing brightens the financial future of the average consumer like significantly reducing or eliminating debt. If you have a low to mid-range credit score holding you back, consider debt reduction to raise your score so you can get approved for loans with attractive terms.
Not Wanting to Own an Inherited Note
When the owner of a mortgage note dies, his or her heir should receive the note through inheritance. If this happens to you, and you aren’t interested in earning income from the product, you can arrange a full purchase of the note through a professional mortgage investor. After the note is sold, it will be like you inherited money instead.
Additionally, you may want to sell an inherited note if you’re in a “bullish*” real estate market; you don’t want to be a landlord and be responsible for collecting payments; and you want to avoid working with low credit buyers.
What should I expect after the sale?
What happens after the sale closes is determined largely by whether you sell the note in part or in full. When you sell in full, you receive the largest lump sum payment through a non-recourse transaction that legally disconnects you from the note. When you sell in part, you receive a smaller lump sum payment but still receive a percentage of monthly income from the mortgage. In either case, the note is monetized in some capacity – meaning you will at least get some kind of lump-sum payment up front.
Who We Are
Amerinote Xchange is a is a loan acquisition firm specializing in the purchase and management of mortgage notes. With a decade of experience in the business, plus the deep financial experience of our team of professionals, we’re perfectly positioned to advise you on the sale of your mortgage note, or purchase the note ourselves if it meets our requirements.
To inquire about our services, contact us today by calling (800) 698-3850, or use our contact form. We look forward to helping you take the best course with your mortgage note sale.
Frequently Asked Questions
What are the benefits of selling my mortgage note?
The benefits of selling your mortgage note can be numerous. By selling your mortgage note, you can receive a lump sum of cash that can be used for any purpose – whether it’s investments, debt consolidation, home improvement projects, or anything else. In addition, you can free up some of your monthly cash flow, as you will no longer be responsible for making mortgage payments. And, in some cases, you may be able to sell your mortgage note for more than the remaining balance of the loan – meaning you could make a profit on the sale.
How do I know if selling my mortgage note is right for me?
Only you can decide whether or not selling your mortgage note is the right decision for you. However, it’s important to consult with a financial advisor to get more information about the pros and cons of selling your mortgage note before making a final decision.
How much can I expect to get for my mortgage note?
The amount you can receive for your mortgage note will depend on several factors, including the current market value of your home, the remaining balance on your loan, and the interest rate of your loan. You can generally expect to receive between 50% and 80% of the remaining balance on your loan.
Cited article sources
- Statistics retrieved from the Mortgage Bankers Association
MBA Chart of the Week Feb. 14 2022: Mortgage Delinquency Rates
- Dodd-Frank Wall Street Reform Act https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
Excellent article .My question is,if I sell the note is the proceeds considered Taxable income?I have already paid the capital gains tax on the sell of the property.Thanks
Hi Gerald – Thank you for the feedback and your question. I will first say, we are not tax professionals and this is not tax advice.
You should fact-check everything with your accountant or CPA as your situation may be vastly different that the next person selling a mortgage note.
With that begin said, In most case of selling a note at a discount, which most notes are traded at, will create a capital loss rather than a capital gain. For example, if you are owed $100,000 and you sell you note in 2023 for $88,000 to a company like ours, you will realize a $12,000 capital loss for 2023 tax year.
This loss could potentially be leveraged to lower your taxable liability on your 2023 taxes.
Again, I would urge you to consult a tax professional that is familiar with tax strategy and situation.
All things are not equal in the world of US taxation so please perform you diligence thoroughly.
Thank you again for the comment and all the best in your endeavors.