Three Borrower Profiles for Seller Held Mortgage Notes and Deeds of Trust

As you may know, seller-held mortgage notes (including trust deeds and similar legal instruments) provide opportunities for borrowers who can’t get the terms they want out of traditional lending institutions. If you opt to fund some or your property’s entire sale you need to study the types of people that aren’t serious risks, but still don’t get decent service from the institutional loan system. Before we start though, we should make one thing clear: Even though you can lend to anyone you wish, you should mind your note as stringently as a bank (and given the way banks have acted, perhaps even more stringently). Your criteria should be different – not riskier. With that in mind, here are three profiles of people who would make excellent borrowers in a seller funding arrangement.

The Successfully Self Employed Borrower

One irony in the real estate business is that even successful real estate agents often have trouble qualifying for the mortgages they want. This illustrates the roadblocks that come up for self-employed borrowers. Banks have a known bias against the self-employed due to concerns about income stability, but too often, hold this against self-employed individuals with even decades’ long histories of being in business. Significant savings and assets can help these people get loans, but in practice this isn’t desirable. Many business owners want to reinvest as much of their income back into their firms as possible to maintain stability and spur growth. The successfully self employed borrower can spare part of his earnings for a mortgage, but doesn’t want to wait several years saving up to convince the bank to authorize the appropriate mortgage for his income level. Like everybody else, owning property is a life stage, as well as an economic decision. He wants to reach that stage on schedule, and if you agree he’s up to it you can help with a seller-held note.

The Credit-Averse Professional

This borrower doesn’t have any debts to speak of. In fact, he may have never had debts. His minimal credit history now works against him when he applies for mortgage loans. He might not even have a credit card. Nevertheless, his other expenses are minimal and he has a secure, well-paying job and excellent prospects. Why doesn’t he have a credit history to speak of? He might come from a tightly knit family that has lent him money for smaller purchases in the past. He might be uncomfortable with credit for cultural or religious reasons, or he might have a single large loan in his history that he successfully paid off, but found so burdensome (like a student loan) at that stage in his life that he swore off carrying debt – but now he wants a house, and he can’t exactly store money in a cushion until it’s time to pay. If you thoroughly investigate his income and professional history with the help of a lawyer, you can decide whether his minimal credit history hides the potential to be an excellent borrower.

The Securely Employed Debt Holder

This individual is an increasing rarity in this economy: someone with strong lifetime prospects due to union membership in a secure economic sector or a similarly potent tie to a trade or profession. Tenured academics are one example of this group. This category might include retirees as well, provided their retirement income comes from a solid source. No matter the exact situation, people in this group have a solid income, but a higher debt to income ratio than banks will accept for the type of loan they want. Even so, the securely employed debt holder can easily budget for additional debt. If you’re considering this type of borrower, look at their total expenses and income source and once again, seek outside advice.