| With any soft real estate market the seller needs to | | | | ongoing relationship with this note arrangement, it will be |
| be more flexible to move the property. If a seller is | | | | necessary for the sellers to underwrite the credit |
| motivated to sell and tells the world through say an | | | | worthiness of the buyers and future note payers. We |
| Multiple Listing Service (MLS) and is offering to pay all | | | | will assume that the seller/note holder is satisfied with |
| the buyers closing costs and prepaids and perhaps | | | | the buyer's ability to repay the second mortgage. It |
| hold a second mortgage will generate lots of buyer | | | | does little good to do this deal, IF the buyers never pay |
| activity. Assuming a natural market exposure has | | | | the second mortgage. |
| already taken place with no offers resulting then | | | | The only way for a seller/note holder to enforce the |
| drastic measures have to be considered by a seller. | | | | payment of the first is to foreclose the second |
| Perhaps the house is now vacant. The sellers by | | | | mortgage and in doing so will need to pay off the first |
| necessity have moved on and need to sell. A series of | | | | mortgage if that is in default as well. This is indeed a |
| price reductions resulted in still no activity. Fortunately, | | | | huge challenge. In most cases the seller throws up their |
| the seller's had made a good purchase five years ago | | | | hands and walks away only because the buyers |
| and have some equity to play with. Buyers and/or their | | | | aren't paying the second mortgage either. Depending |
| agents looking for real estate opportunities need to | | | | on the state, a defaulted judgement might be sought, |
| look for such a situation as with a vacant home, on | | | | but it could be a long line. Knowing all of this, the seller |
| lock box, lower or not mortgage with perhaps a series | | | | closes the deal and is relieved of the payment of the |
| of price reductions in the past say 60 days all screams | | | | first mortgage and gets some cash at closing plus this |
| "motivated seller here". | | | | second mortgage note. The tough time for any lender |
| Many buyers who have jobs and means to make | | | | is timely receipt of the first mortgage payment. Many |
| monthly housing expenses have for what ever | | | | foreclosures happen the first month. The borrowers |
| reasons have lousy credit. Sometimes bad things | | | | scramble to scrape together every penny to get into |
| happen to good people. It could have been a recent | | | | the property and the first payment rolls around and |
| forced job change, family illness, auto accident, death in | | | | they can't make it. Knowing the buyer/borrowers have |
| the family causing a one or two month interruption in | | | | challenged credit, twelve months of on time payments |
| the family cash flow. Credit FICO scores plummeted in | | | | would be the trip wire for doing anything with this note. |
| the lower 500 range. Things are turning around now, | | | | To assist the borrower when they refinance keep |
| but the challenged credit history remains. What to do? | | | | careful financial records on the payment history by |
| If a family does not wish to wait two years to turn | | | | insisting they pay with a postal or bank money order |
| their credit around there are several possibilities. With | | | | and keeping copies of payment checks. |
| these lower scores many B/C Subprime Mortgage | | | | This supports the case of proving "seasoning" of the |
| Lenders will allow anywhere from 80% to a 95% Loan | | | | mortgage with on time payments. Since this loan will |
| To Value Mortgage. | | | | not be reported to the credit bureaus ready proof of |
| At the same time these mortgage lenders may allow | | | | payment will be an important part of the borrowers |
| a 100% Combined Loan To Value (CLTV) mortgage | | | | qualifying for a new loan. Keep the note and mortgage, |
| with the seller holding a second mortgage for the | | | | the mortgagee title policy, copy of the survey, copy of |
| difference. Mortgage markets change all the time | | | | the appraisal if you can get it (only for sharing value |
| based on secondary mortgage experiences with | | | | facts-not for loan purposes), copy of all payment |
| foreclosures and slow payment histories. Right now, | | | | documentation, copy of the buyer/note payers credit |
| this scenario is possible in this current slow real estate | | | | report, buyer authorization to pull another credit report |
| market. In addition, the lenders will allow the seller to | | | | if you choose to sell the loan together will all the copies |
| pay in many cases up to 6% of the contract sales | | | | of the note payment checks of the money orders |
| price for the buyer's closing costs and prepaid | | | | used to pay all collected in a nice neat file. |
| expenses such as the annual hazard insurance | | | | Moving the clock forward twelve months and being |
| premium and escrows for the taxes and insurance. In | | | | presently surprised, the payments were made on time |
| some cases, these credit-challenged buyers using this | | | | as agreed. Things had improved in the buyer |
| financing technique can buy a property with little out of | | | | borrower's credit and they both had received pay |
| pocket. In the past, these buyers may have been | | | | raises in their jobs. If a seller/not holder cannot wait for |
| kicked to the curb and told to come back when they | | | | the two or three year period, whichever occurs and |
| have some money saved and improved their credit. | | | | wants to do something with the note then there are |
| This does not have to happen today, at least by | | | | some possibilities. In review, the note was for |
| mortgage brokers who know their products. Buyers | | | | $20,000.00 with a rate of 10% per annum with a |
| need to seek and qualify Realtors and Mortgage | | | | payment of $175.51/month and a thirty-year term with |
| Brokers who are willing to go to the wall for them to | | | | a 36-month balloon payment. At the end of twelve |
| get the deal done. | | | | months the balance is approximately $19,888.82 with |
| Previously, in the red-hot peaking real estate market, | | | | very little amortization. Keeping in mind the shaky credit |
| this flexible seller help was not existent. Now it is | | | | of the borrower, but quickly improving and the property |
| possible with rising housing inventories and motivated | | | | has now appreciated to showing a value of 110% of |
| sellers that have to act. Opportunities now exist for | | | | the original purchase price. An investor MAY take a fly |
| buyers with challenged credit. It could have been done | | | | on this, due to credit considerations, at a yield of say |
| before, but the buyer would have needed at least 5% | | | | 25% yielding $15,256.26 less transfer costs with a |
| down or more and pay for all their closing costs and | | | | balloon of $19,603.33 in 24 months. |
| prepaids. In most cases, having just gone through the | | | | This is a hit of ($19,888.82-$15,256.26-$800 in transfer |
| financial wringer, no cash was available for this. A | | | | costs) $5,432.26 netting the note holder |
| minimum of a 580 credit score is needed currently for | | | | $15,256.26-$800 = $14,456.26. Keep in mind the note |
| an 80/20 100% CLTV Combo loan. With the market | | | | holder also received 12 payments at $175.51/month for |
| change, other financial options are available for credit | | | | a total of $2,106.17 for a total return of $14,456.26 plus |
| challenged buyers like the seller held second mortgage. | | | | $2,106.17 in payments for a total return of $16,562.43. If |
| The seller receives the offer at the newly reduced | | | | a note holder wanted to buy a new or used truck, |
| listing price, with the seller paying all the closing costs | | | | depending on the model, cash could command a |
| prepaids and holds in this case a $20,000 second | | | | discount and avoid a lot of finance charge. Cash talks. |
| mortgage payable at 10% with a 30 year term and a | | | | Another scenario if the current note holder wanted to |
| three year balloon. The payments for this seller held | | | | buy another property the full face value of the note |
| second mortgage work out to be $175.51/month for | | | | could be used as part of the down payment. If it would |
| principal and interest. It should be noted here, that the | | | | happen to be an income property the power of |
| buyer has qualified for a 2/28 ARM where the first | | | | leverage would be at work with greater than say a |
| two years are fixed, in this case a rate of 8.75% then | | | | fully taxed interest income versus buying an income |
| the rate based on a six month LIBOR (London | | | | property with depreciation, interest deduction and |
| Interbank Offered Rate) plus a margin of 6.00%. The | | | | property appreciation potential. In all cases, these |
| current 6 month LIBOR rate used for this index is | | | | scenarios have to be done with no recourse. Always |
| 5.50%. With the mortgage rate fixed two years the | | | | in every instance of selling paper the note payer is the |
| borrower is set up for an immediate rate hike in two | | | | best candidate as a note buyer. If you can give the |
| years. If nothing changed in the index, the rate at the | | | | note payer say a $2,000 or a $3,000 discount rather |
| end of the two-year period would be 8.75% plus 1% or | | | | than the professional note buyer there may be |
| 9.75%. For the next six months a rate of 10.75% the | | | | someone in the family who can step up and take |
| next six months with incremental increases with 1% | | | | advantage of the offer. It's always good to check with |
| cap increases every six months thereafter based on | | | | the note payer first. Somehow, they may be able to |
| the index plus the margin rounded up to the nearest | | | | make it happen. Instead of accepting $14,456.26 a note |
| .125%. In this case, the index (assuming nothing | | | | holder might get $2,000 to $3,000 more than what the |
| changes-we are being kind here) 5.50% plus the fixed | | | | market offers. It can't hurt to ask. |
| margin of 6.00% would command a rate of 5.50% + | | | | There are options for second mortgage note holders |
| 6.00% or a total rate of 11.50%. This is no place for | | | | other than just waiting for the payments each month. |
| widows and orphans or any young couple trying to | | | | Many note buyers upon completing a note purchase |
| rebuild their credit. With on time payments for the first | | | | will immediately contact the note payer and offer to |
| 24 months on the first mortgage and the second | | | | cut the note rate in half if they note payer will double |
| mortgage and some small appreciation occurs on the | | | | their payment or if somehow they can make triple the |
| appraised value the buyers will need to refinance at | | | | payment they offer to make the interest zero. The |
| the end of the two-year period. Their credit scores will | | | | note holders will need to deal with the "imputed |
| rise with on time payments. | | | | interest" question on their own. The bottom line for the |
| Lenders however, will not consider any seller held | | | | note buyer is if the note payer agrees the interest rate |
| second with a balloon payment less than three years. | | | | yield is spiked even higher far above the discounted |
| A loan condition of the first mortgage will require the | | | | rate. The note payer saves interest and accelerates |
| underwriter to see the seller held second paper work | | | | the accumulation of equity so that in the two year |
| as a condition of loan approval. In this case, if | | | | period can refinance and avoid the huge payment |
| everything goes according to plan, then the second | | | | shock to follow. It's a "win-win" situation for both |
| mortgage would be cashed out at the end of the | | | | parties. These are some of the techniques pioneered |
| second year when the financing for a new first is put | | | | by champions of the "paper game". Sometimes the |
| in place. If the buyer asks if you will subordinate the | | | | note can be originated in three or four small notes. |
| second to a new first, just say NO, unless they are not | | | | Also a note could sell 36 months of payments and |
| able to get the new financing without your help and | | | | keep the balloon. That would yield a little cash in this |
| they have paid on time and as agreed. Then and only | | | | instance and the balance at the balloon payoff. A 25% |
| then will the note holder need to help them defuse the | | | | yield on 36 payments would be worth $4,414.36 less |
| issue. Assuming all has gone as expected it is during | | | | transfer costs plus the balloon at 36 months would be |
| this loan qualification period the second mortgage | | | | approximately $19,630.33. There are many options for |
| holder becomes intimately familiar with the buyers. | | | | note holders of seller held seconds. It's all in a means to |
| Since there is going to be a least a two or three-year | | | | an end to sell the property. |