Four Tips for Structuring Your Private Mortgage Notes |
| As seller financing gets more popular, home owners have been jumping into private mortgages, but without proper planning, these eager sellers are bound to encounter problems. The first rule of negotiating seller financing is to always do a thorough investigation of the borrower’s credit, but what else do you need to do? The following four tips are be no means a complete guide, but they should at least start you off in the right direction.
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Get an Attorney: Never draw up a seller-held note without consulting with a real estate lawyer. To be extra sure, don’t just get the lawyer to inspect your documents and procedures. Get his or her opinion on whether the note’s terms and conditions are appropriate. Seller-held notes can end up with all kinds of unusual features – you don’t want an innocent-looking clause to hurt you.
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Advertise a Down Payment Requirement: One way to weed out unqualified borrowers is to advertise your down payment up from. In the post-real estate crisis era, people who looked to the sub-prime markets for 100% financing or more may approach you in search of a similar deal. Don’t fall for it. 10% is a reasonable down payment, and you might even seek out more to attract people in search of shorter repayment period.
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Don’t Rip Yourself Off On Interest: One of the most common mistakes seller financers make is in setting too low an interest rate. Remember, as a private note holder you deserve compensation for what constitutes a relatively greater risk on your part. Furthermore, you’re providing extra service by allowing for very personalized terms, for borrowers who might not be able to get them through institutional mortgages. Thus, you should be charging above market rates in most cases.
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The Shorter, the Better: Lenders are getting used to the fact that seller-held notes aren’t just reproductions of standard mortgages and learning that shorter amortization periods are better. They minimize risk by reducing the opportunities for emergencies to derail the borrower’s plans and are more valuable if the seller decides to sell his note to a mortgage note broker. These days, amortizations of 15 years or less are popular, particularly when they include balloon payments to quicken the loan’s resolution.
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Remember if you can sell your note if you need to step up compensation in case of an emergency or simple lifestyle change. If you’ve already set up seller financing, get a mortgage note quote to see how you might benefit from selling now.
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