Mortgage Notes & Seller Financing: What You Need to Know

While a mortgage should be a vehicle for complete homeownership, many buyers and sellers are coming to realize the obstacles associated with a traditional mortgage loan. Buyers who have a poor credit score, gaps in their employment history, or too much debt run into trouble when they apply for a mortgage. Meanwhile, strict lending terms and requirements can make it difficult for sellers to find a buyer. As a result, some buyers and sellers are turning the seller financing to overcome these road blocks. But, before you consider this route, read through these frequently asked questions about seller financing and mortgage notes.

What is seller financing?

Seller financing is exactly what it sounds like— instead of the buyer taking out a mortgage loan from the bank, the seller lends the buyer the money needed to buy the seller's property. In this type of transaction, which is called seller financing agreement or seller-financed mortgage, the property seller finances the sale and then assumes the role of the lender. So, instead of making monthly payments to a bank or credit union, the buyer pays the seller for the next 10, 20 or 30 years. Once the terms of the contract are agreed upon, the buyer signs a promissory note, which is a promise to repay the loan. The buyer also signs a mortgage contract or deed of trust (depending on the state in which the property is located). These documents allow the seller to foreclose on the property in the event that the buyer fails to pay.

What is a mortgage note?

A mortgage note is a promissory note secured by a specific mortgage loan. It's a written agreement between the seller and buyer that requires the buyer to repay the loan, including interest, over a specific period of time. It's similar to a traditional mortgage in that the buyer has to make monthly payments to the lender. The buyer owns the property after repaying the loan.

If the seller does not want to assume the role of the bank, he/she can sell the mortgage note to a mortgage note buying firm in exchange for a lump sum of cash. In the event that the seller sells the mortgage note, then the property buyer would make monthly payments to the note buyer/owner.

What are the benefits of seller financing?

Seller financing offers benefits for both property buyers and sellers. For buyers, it allows those who wouldn't qualify for a traditional mortgage to receive financing to buy a home. Second, with a seller-financed mortgage, the buyer doesn't have to go through the long loan application process of a traditional lender. Additionally, since the property seller determines the loan requirements, the down payment and repayment cycle are more flexible than with a conventional mortgage.

There are also several major advantages for sellers. As it offers more flexibility, a seller-financed loan makes it easier for sellers to find a buyer for their property. Next, sellers have a better chance of receiving their asking price because the buyer likely has a credit history that makes him/her non-eligible for a bank loan. Lastly, sellers can sell mortgage notes for a lump sum of money.

Why should I sell my mortgage note?

When you sell your mortgage note you receive a lump sum of money, and the note buyer takes over all the responsibilities and risks associated with note ownership. If you sell your note, the property buyer will make payments to the note buyer. You would no longer need to worry about the buyer making payments on time or the risk of default and foreclosure.

What's my mortgage note worth?

A mortgage note's value is greatly influenced by the terms of the loan agreement and how well the buyer satisfies these terms. Some things to consider are:

• A note with a big down payment is worth more than a note with a smaller down payment.
• A note with a higher interest rate is worth more than a loan with a lower interest rate.
• A note with a history of on-time payments is more valuable than one with an inconsistent payment history.

Other factors that can influence your note's value include:

• The current conditions of the real estate market
• The type of property that is backed by the loan
• How soon the loan will be paid off

There are some things you can do to maintain the value of your note. First, make sure the buyer makes on-time payments and maintains the property. Additionally, the loan's terms should reasonably anticipate the buyer will pay the loan off on time.You can also maintain its value by selling your property to the person with the highest credit score, setting a high interest rate, and/or requiring a larger down payment.

Can I sell part of my note?

Yes, you can do what is a called a partial note sale. A partial note sale enables note owners to sell a portion of their note. You will receive a lump sum of cash for the portion that you sell and continue to collect monthly payments on what remains. This will allow the note seller to receive much more money over the life of the loan.

Are their risks associated with mortgage notes?

The risks of mortgage notes are similar to those associated with a traditional bank loan. The biggest risk is that the buyer would default on the loan. A poor credit score and credit history could indicate the loan will not be paid back on time. If the buyer does not pay, there is the risk of not generating income from the property until you find another buyer. Fortunately, all of these risks can be avoided by selling your mortgage note in full. As explained above, a full note sale would absolve you of any risks and responsibilities related to note ownership.

How do I sell my note?

At Amerinote Xchange, we follow a 12-step process of buying mortgage notes. First we will provide a quote for your note. Then, you will accept the bid and submit to us a copy of your note, along with a copy of the deed of trust, mortgage, or land contract (varies by state). We will perform an asset verification, during which we will confirm he note's LTV and borrower credit and get an estimate on the property value. Next, you will be asked to submit the following documents to us for underwriting:

• Settlement Statement or HUD1
• Proof of Payments Record
• Proof of Homeowners/Fire Insurance
• Tenant Rental Agreement and Rental Amounts (rental and commercial properties only)
• Pictures of Property (if available)
• Escrow Instructions from Origination of Loan
• Title Insurance Policy
• Copy of UCC1 Financing Statement (commercial notes only)
• Copy of 3rd-Party Loan Servicing Agreement (if applicable)

You will then review, sign, and return the note purchase agreement and seller checklist. We will order and pay for an appraisal or BPO (broker-pricing opinion), depending on the state and property type. Next, we will receive and approve the appraisal, order and pay for a title search, and clear the title for closing. We will schedule a time and date for closing, and then you will receive your check from us or a title company or attorney’s office of the note seller’s choosing. This entire process takes between 15 and 35 days, depending on your location and the availability of appraisers and title companies.

To learn more about seller financing and selling your mortgage notes, please contact me at 1-800-698-3650 or visit my company website at www.amerinotexchange.com.