As a individual private
mortgage buyer, I continue to be surprised at not only the terms of many privately created notes but the pretty loose way they were allowed to be created. And while I do understand how a anxious home (or commercial property) seller could easily fall into the 'anything just to sell the property' pitfall, many of these tips won't effect the purchase but will still help protect a newly created financial asset – the private note.
Following are some easy to follow steps you may want to want to consider when owner financing to 1) Form a more valuable and marketable private mortgage, should you ever need to sell the mortgage and 2) Do more to protect yourself from future financial loses.
1. Demand at least a ten percent down payment, even if it has to be in multiple installments. A buyer with no "skin in the game", as seen by the default rate on 100% traditional mortgages is a much more serious risk than one with significant money on the line.
2. Pull credit on the borrower. If you can't pull credit yourself, require the borrower to provide you with a recent credit report from all 3 bureaus including all 3 bureau scores. Keep a copy of the report, particularly if you plan on selling the private mortgage down the road. Even if you don't turn a home buyer down because of less than pristine credit because you really have to sell, you can often use the below par credit to demand a higher interest rate. And don't forget, there may be perfectly legitimate reasons for the poor credit such as the loss of a job or illness. Did you know that medical expenses are the number one driver of Bankruptcies in the U.S.? Even people with good jobs can be wiped out if they don't have health insurance. I've run into many people with health insurance take a serious hit in credit scores because of their health insurance company rejecting some reimbursements or paying really slowly.
3. Use a good lawyer or title company to close the deal and be sure the note allows you to pull credit as well as sell the mortgage note in the future. Someone approached me recently to sell a note, only to find out the note had a "non transfer" clause. You have control over this process. Be sure the note is created in your favor.
By following these steps when owner financing a home or commercial property sale, you dramatically reduce your chances of a loss down the road.
Ron Stone is a financial specialist. His businesses include a private note buying business as well as a no doc jumbo loan business. Check out his websites at
Sell My Note and
No Doc Jumbo Loans
