Before creating a quality mortgage note, it’s important to understand the concept of seller financing. When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing. The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.
The buyer and seller sign a document defining the terms of repayment including the agreed upon interest rate, number of years to repay the loan, and the monthly payment. This document is called a Real Estate Note, also known as a mortgage note.
When using owner financing to help sell your property, creating a high-quality promissory note and mortgage is of primary importance.
Components of Creating a Quality Mortgage Note
- Sale Price. The sale price should not be less than the property’s fair market value. In most cases, since you are offering the financing, it will be more.
- Down Payment. Make it your goal to negotiate as large a down payment as possible. The bigger the payment, the more committed the buyer will be to protect their investment.
- Interest Rate. The interest rate should be higher than banks by 5-7 percent.
- Credit Score. Just like any creditor, you have the right to know how credible the source of income is that will be paying towards the mortgage note. You do not have to provide owner financing if you do not feel comfortable with their credit history. If the credit score is lower, insist on a larger down payment.
- The amortization of a mortgage note refers to how many payments are scheduled. Scheduling a balloon payment in the note is a method that shortens the term of the note without increasing the monthly payment of the buyer. You can offer to amortize the debt over 30 years and ask for a balloon payment of the balance at year seven.
- Escrow Payments. Banks require monthly escrow payments for taxes and insurance, as a lender, you should too. This will ensure that those items are paid.
- Title Insurance. As the lender, require the borrower to provide a policy of title insurance. If you decide to sell your note, this policy will be helpful and save you time and money.
- Closing the Sale. As the seller, the financing documents protect your interest. An attorney on your behalf should prepare these documents. Once closing is finalized, your mortgage note should be recorded immediately to protect your first lien position.
In order to create a quality mortgage note, follow these tips and visit Beacon Capital 360 for more information on seller financing.