I have met many note sellers who don't follow the advice to be ready. Putting together a note for resale in the right way can make the difference between selling it quickly and with little trouble and selling it too cheaply or, even worse, not selling it at all. To correctly set up a mortgage note for resale, do the following:
- Try to pay back the loan in less than 10–15 years. Anything older than 12 years gets a much bigger discount than, say, a 10-year balloon. Most of the time, the Note Investor wants to be done with an investment in 5–10 years. If your borrower's situation allows it, the best choice is between 5 and 10.
- Before giving the note to a Note Buyer, it helps a lot if the seller orders and finishes an appraisal. Because giving an exact legal appraisal to a Note Investor lets them make a more accurate bid, which makes the deal go smoothly. So, when the note is written, there won't be any surprises about the property that is used as collateral. This step is not necessary, but if you do it, your chances of a very smooth note sale go up by a huge amount.
- Get as much of a down payment as you can. In a perfect world, the Note Buyer would like to get 25 percent, but you can get away with 15 to 20 percent if you have to. For a Note Investor, anything with less than 15% equity is very risky. If your down payment is less than 14 percent, it will be very hard to get a high bid on that note. Anything with less than 10% down isn't likely to sell at all.
- Give a short-term loan with a high interest rate. Meaning, make sure your borrower can afford the payments at the shortest term she/he can legally agree to.
- Add a prepayment penalty based on the rules and laws in your state.
- Make sure that you (the seller) check the borrower's credit. Ideal would be a FICO score between 600 and 700. Remember that you should ask for a bigger down payment from people with bad credit. Keep a copy of the credit report so you can show it to the mortgage note investor who is underwriting the deal. When it comes to credit scores, 650 or higher is good to excellent. Good is 610-649, and fair is 609-590. 589–500 is bad, and if you get below 500, don't even try. Try to find out about the borrower's debt-to-income ratio (DTI) as well. How much money comes in each month versus how much money goes out each month. In a standard credit report, you can see what the borrower pays each month. After that, all you have to do is find out how much the borrower really makes after taxes. This way, neither you nor the Note Investor will be surprised, and you'll be sure to get the best bids. The most you should allow for D.T.I. is 45 percent. This means that if the borrower makes $5,000 per month, a 45 percent DTI ratio would be $2,250 in debt each month ($5,000 x 0.45 = $2,250). The person only has to pay back 45 percent of what they make each month.
Please remember that the information above is only a guide. If you have questions about how mortgages are started in your state, you should talk to a licenced mortgage broker or banker or an attorney. Be ready at all times!
Having this information ahead of time can make the difference between a transaction that goes smoothly and one that is a total nightmare. Best of luck!
