Are Seller-Held Notes An Alternative to FHA Influence? |
| The Federal Housing Administration (FHA) is reportedly considering tighter rules for qualifying homes under its program. These include typing payments schedules to credit scores and increasing down payments. Changes like this are sure to influence institutional mortgage rules. Currently, the market is in the midst of a seeming contradiction, where oversupply should dictate a buyer's market, but cautious policies effectively restrict many would-be home buyers from actually taking advantage of this due to increasing restrictions. |
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What is the FHA? Descended from the Recession-era's housing market disaster, this division of HUD insures and mortgages homes that conform to its rules. During the subprime crisis, these rules were pretty loose, and in some cases were even ignored. As the market trembled, more mortgages came under FHA control, to the point that in 2008, the total number constituted nearly a third of US mortgages. Thanks to the crisis, the FHA's insurance payouts have drained its coffers so that it now possesses only a fraction of the assets it's required to hold by law.
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| The FHA desperately needs to balance its books, so tinkering with the rules is a logical next step. It also signals that the FHA understands stewardship problems in the old housing market and won't repeat them, which is vitally important to increasing confidence in the post-recession era. This will naturally cause adjustments throughout the institutional mortgage loan system, increasing down payment costs and qualifications.
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In one sense this is a good thing because it stands to fix weak spots in the system that could let in toxic loans. Unfortunately, this will catch a number of reputable borrowers as well. Examples include professionals carrying old student loans (bad for their credit, but not reflective of their current income expectations) and people looking to move into starter homes who will now need to save more to make that big step.
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| This may be an opportunity for seller funding. You can use a private mortgage note to attract borrowers who have fallen through the cracks of a cautious system. Be careful, however. When we talk about people who've "fallen through the cracks" we are never referring to truly risky borrowers. As a private note holder, it's your responsibility to thoroughly investigate every potential borrower and take your pick from those who are most likely to be responsible partners in the arrangement, even if they don't look it in situations where a loan officer is just checking off answers on a clipboard. You're not going after bad borrowers, but good borrowers who've gotten entangled in technicalities.
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| As you might guess, a seller held note is serious business and needs to be managed with care and patience. If you want to relieve yourself of those particular burdens, the alternative is to sell your note to a company like DMO.
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