Using a Private Mortgage to Sell a Property Quickly
Posted by Admin on June 30, 2018 | 0 Comment
There are thousands of lenders, banks and financial institutions out there that offer mortgage loans – but they’re not the only option. For sellers looking to offload a property fast – or avoid the hassle and headache of constant showings, bidding wars and negotiations – private mortgage loans may be a better option.
Need to Sell Fast? Offering A Private Mortgage Is Your Answer
Private mortgages offer sellers a quick and easy route to reach eager, ready-to-buy home shoppers – particularly non-traditional ones who can’t get approved by big-box lenders.
With banks, credit unions and other financial institutions, the mortgage process is a lengthy and time-consuming one. There’s countless documentation, tedious underwriting processes, and it can take weeks or even months to complete.
And sometimes, even then, the loan fails to fund, and sellers finds themselves back at square one.
Private mortgage loans – also called seller-financed loans — offer an alternative to these traditional routes, cutting out most of the difficult red tape and inefficient processes, and giving both the buyer and seller a faster, easier and more convenient way to close the sale.
Other Benefits of Private Mortgage Loans
One of the biggest benefits of offering a private mortgage loan is that you broaden your base of potential buyers. No longer are you tied down to just the buyers who have been prequalified by big banks or lenders. Instead, you’re able to expand your efforts to include more alternative shoppers – those who are self-employed, contractors or bouncing back from credit issues.
You may also be able to get more for your home as well as steady, long-term monthly income when using a private mortgage loan. Because you can appeal to buyers otherwise shut out by traditional lenders, they’ll likely be willing to pay a premium – meaning a higher listing price, a higher mortgage rate or maybe even both.
Offering a Private Home Loan? How to Protect Yourself
Private home loans can be hugely advantageous to both buyer and seller – but they can also be dangerous if not handled properly.
For one, it’s important to remember you’ll still have a stake in the property as a private mortgage lender – at least until the buyer has paid off the loan or you’ve sold the note. Because of this, you’ll need to do your due diligence in vetting the buyer. Have they owned a home before? Are they prepared to care for the property and maintain it? Ask for references from previous landlords, if possible.
You’ll also want to have a rock-solid private mortgage agreement in place, one that spells out your interest rates, payments, deadlines for those payments and any repercussions if the buyer misses a deadline. You should also specify exactly how you want to be paid (electronic methods are your safest bet), and make sure to cover prepayments – whether they’re allowed and if there’s any penalty. Before finalizing the contract, you will want to bring in a qualified real estate attorney to make sure you’ve covered all your bases.
Cashing in On Your Private Mortgage Loan
When you offer a private mortgage loan to a buyer, you become the lender – meaning you’ll need to follow up on payments and keep track of the loan’s performance over the long-term.
For most private mortgage lenders, there comes a time when they’re tired of handling the day to day management of the loan, and they’re ready to cash in on the property or move on to new ventures or investments.
At this time, lenders can opt to sell their mortgage loans – also called “mortgage notes” – to an experienced note buyer. These buyers specialize in purchasing mortgage loans, or even portfolios of mortgage loans, from private lenders and investors in exchange for cash. Though a note buyer won’t pay sellers for the full, outstanding balance of the loan, they will make an aggressive offer based on its performance and the remaining time/balance left on the note.
Is Private Mortgage Lending on Your Radar?
If you’re even considering offering a private mortgage loan as a home seller, you’ll want to be sure and structure that loan with the end note buyer in mind. Unless you plan to act as the bank for the next three decades (the typical term for a mortgage loan), optimizing your loan for a note buyer can ensure you have an exit strategy – and a profitable one – when the time comes.
Typically, note buyers are looking for private mortgage loans that:
1. Have a down payment of 10 percent or more – For a note buyer, a 10 to 15 percent down payment is fair, 15 to 20 percent is good, 21 to 30 percent is great, and 31 percent or more is a slam dunk. Generally, the bigger down payment you’re able to collect from the borrower, the more interest a note buyer will have in the end.
2. Have creditworthy borrowers – Most credit-score-sensitive note buyers won’t consider a loan if the borrower has below a 580 credit score – though this is the bare minimum. A note buyer is always going to prefer loans in which borrowers have high credit scores – 680 or more, ideally.
3. Loan will mature within 5 to 10 years – The majority of private note buyers typically want to steer clear of any investments that won’t pay out for more than a decade. They may still purchase longer-term loans, though it would be at a steeper discount than shorter-term ones. A balloon payment in 5 to 10 years may be used to achieve this goal as well.
4. Come with an appropriate interest-rate markup – Note buyers like to see an interest rate somewhere between 2 and 6 percent higher than the going market rate. This usually falls into the 5 to 10 percent range.
5. Show history of payments – Solid records of on-time payments (like bank statements showing monthly deposits, for example) are vital to attracting a note buyer. Be sure to keep diligent records of your borrower’s down payments, prepayment, monthly installments and more, so you can show your future note buyer the loan’s a safe bet. Sellers can also outsource this to a loan servicing company for cleaner records and less hassle. This is usually done for a small monthly fee ranging between $6 per month to $20 per month. This monthly cost could also be passed onto the buyer if outlined in the terms of the agreement.
Going Forward with a Financing a Private Home Loan
Are you considering offering a private mortgage when selling your property? Then learn more about creating a valuable private mortgage note and get in touch with Amerinote Xchange when you’re ready to sell. We offer fast, aggressive in-house offers and are here to help every step of the way.