So, you decided to sell your home with Seller Financing, what are the steps I should follow to set up a successful Note? How do I select a buyer from all that are interested? How much can the buyer really afford? How much down should I require? What terms should I negotiate in the contract? Should I go alone or look for professionals to assist?
INTRODUCTION
When selling your home with a seller-financed Note, there are many important steps that you need to complete before getting your first payment. And not surprisingly, these steps can determine if your Note will be successful or fail.
Starting with the buyer, there are many aspects to consider, from credit worthiness to affordability. Putting together the terms is an important aspect and realize there is not a single “one size fits all” template that you follow. Each deal can have unique items that fits the need of both seller and buyer. And finally, closing the deal will require numerous steps and may have a few bumps. The importance of having professional support cannot be more emphasized!
So, before you agree to “Be the Bank”, read these steps for setting up your seller financed Note!
STEPS TO FOLLOW
#1 – Review the Buyer’s Credit
How buyers have paid bills in the past is a good indicator of how timely they will make future payments. Always review the buyer’s credit prior to accepting a promise to pay.
Sellers can obtain a signed authorization from the buyer to pull credit through a reporting agency or simply ask the buyer to obtain a copy of his or her report for review. Most note investors prefer credit scores above 675. If the scores are lower, it will likely reduce any offers to purchase the note after closing.
#2 – Verify Affordability
If a buyer can’t afford the monthly payments, it soon results in late payments or worse, no payments. Buyers should be willing to share their job history along with how much money they make each month. Paycheck stubs or tax returns can help verify the income.
A common gauge of affordability is to keep the housing expenses around 27-30% of income. The monthly housing expense is a combination of the principal and interest payment plus 1/12th of the annual property tax and insurance bills (known as PITI). If a buyer makes $2,000 per month, then the PITI should be no more than $540 – $600 using this rule of thumb.
#3 – Get a Down Payment
The more money a buyer puts down, the more “skin” they have in the deal. The greater the equity, the lower the likelihood the buyer will stop paying.
When people have little to no equity, they are more likely to default or just walk away from the home. Few sellers want the hassle of taking back a property through foreclosure, so increase the odds in your favor by requiring a down payment.
#4 – Set Valuable Terms
The terms include interest rate, payment amount, and the due date for payment in full. There are also late fees, default clauses, requirements for insurance, and other standard provisions.
While the terms can be whatever the buyer and seller agree upon, sellers that charge 2-4% above the standard mortgage interest rate increase the value of future payments. The buyer still saves on the expensive loan fees, and the seller is compensated for having to wait for payments. Charging a rate below market means the buyer is unlikely to refinance in the future but it also results in a higher discount if the note is sold.
#5 – Seek Professional Help
The legal documents are an important part of safe seller financing. They put the agreement in writing and make sure the terms can be enforced. The do-it-yourself approach is great for some projects, but when it comes to legal documents seek the help of an attorney or title company familiar with local laws and the HUD Safe Act.
These professionals handle the closing and prepare the documents. They will likely suggest a Promissory Note for the obligation to pay with a Mortgage or Trust Deed recorded in the county records. In some states a Contract for Deed or Real Estate Contract can be an alternative option. The HUD-1 Settlement Statement itemizes the sales price and payment of closing expenses.
The final professional to consider is using a third part servicer in managing your Note. A servicer will handle all communications with the borrower, accept monthly payments and complete all compliance reporting. While there is a monthly charge for this service, you add these costs into the terms so that the borrower will pay these charges in addition to their monthly payments.
SUMMARY
Following these steps for creating a solid seller-financed Note can ensure your Note will be successful from the start! Ensuring the buyer is both credit worthy and has the means to afford the monthly payments are key first steps. Creating terms that match the needs of both the buyer, and you the seller are key to establish a successful long-term relationship. Finally, working with professionals that have Note experience is key to get through closing with no issues.
As a final note, if you have followed these steps you will create a Note that is very marketable and receive top offers in the future if you decide to sell to an investor!
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