A friend is the loaner on my mortgage. Can he sell the mortgage if needed?

Question

Due to my DTI ratio, I had a hard time finding a conventional lender to give me a mortgage on my primary residence after paying cash for the house.  A friend of mine is going to be the lender and act as the bank on my mortgage.  We're putting a 5 year balloon on the note in case he wanted his money out then.

I was wondering, if he was to want his money out sooner than that, would it be possible for him to sell the mortgage and if so, what percentage of the principle could he expect to get considering the mortgage was in good standing?

Peter Halliday · Answer

@Palmer Thomas has this loan already been made?   If not some things that can be done to make it attractive to note investors.  First, is to have a third party service handle the underwriting like Call The Underwriter.   Second, use a lawyer to draft a note and mortgage that’s more standard for that state.  It not being a land contract will make it a bit more sellable.   Third, having it serviced by a servicing company, so accurate records are kept and transitions are smoother.   I would bet it having a balloon may limit the sale.  Some may not want it and some will.  as for percentages to expect, it does depend on the current interest and length of seasoning and strength of underwriting and LTV.   But if you seasoned it for a year it might sell for 95% or more.

Ned Carey · Answer

@Palmer Thomas       Would there be a clause used to indicate that the lender could call the loan at a certain point or, if preferred, could allow the loan to continue in the same manner?

Yes a note can be written that way. An attorney should write it up.

Keep in mind that if this is for your personal residence then certain laws have to be followed primarily the "Dodd Frank act"  If this is not followed the Note may be unsellable. If it is for a rental or investment property then it is a much easier process. There has been a lot written here about the Dodd Frank act and various lending regulations.

Jeff Copeland · Answer

A couple of thoughts:

1. The balloon payment at the end of the note is not optional. It's not there "in case he wants his money out then". Your balance will be due in full at that time.

2. Yes, there is a market for note investing. It's very very common. The present value of the note will depend on a lot of factors (the age and performance of the note, the interest rate, the strength of the borrower (risk), etc.). There's plenty of info here on BP about note investing.

Chris Seveney · Answer

@Palmer Thomas

1. Yes

2. Top dollar for it would be to have it with a servicer and higher interest rate

Investors will want 10-12% so if the loan is written at 5-6% he could expect around a 50% on the dollar for the UPB

Adam Walter · Answer

I would do a little more research and reach out to an attorney if you want to make the note marketable. Since it’s your primary residence the loan would be owner occupied and fall under Dodd Frank regulations. I’m pretty sure you can’t have a balloon payment and most investors probably won’t touch it.

Jeff Copeland · Answer

@Palmer Thomas - See my comment above and make sure you understand what a balloon payment means. I do not understand what you mean by "He is actually more interested in keeping the loan going after the balloon". Once the balloon payment is due, you pay him off in full and that's it. The note does not continue after that. The underlying point here is you will need to have the cash to pay off the full balloon payment when it comes due. This is often done in conjunction with a refinance into longer term debt.

Nathan Grabau · Answer

There are secondary markets. It is probably going to be really hard for him to get access to them given that he is not a banker or regulated somehow. The market value of the loan will depend primarily on the interest rate(vs market rates) and the time remaining on the loan(before the balloon). I would google videos on how bonds are valued to get an idea of how a local bank would receive him/ value the note if he came in looking to sell the paper.

I would not make any promises and shorten the balloon if he thinks he will want his money sooner. Obviously there is a risk reward that both of you are taking, and for him, with the length of the balloon, the primary piece has to be that he should want to lock in the higher rate you are giving him as rates continue to fall. You guys need to do your very best to feel comfortable with the terms you have both agreed to, and make sure there is no expectation of "can you do xyz for me because we are friends?"

Palmer Thomas · Answer

Would there be a clause used to indicate that the lender could call the loan at a certain point or, if preferred, could allow the loan to continue in the same manner?

A friend is the loaner on my mortgage. Can he sell the mortgage if needed?

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