Seller Financed Note Fundamentals

Are you considering creating your own Owner Financed Note? 

Seller Financed Note Fundamentals

Wondering if creating an owner financed note will work for you?

What do you need to include in the owner financed note?

Here are 5 components of a seller financed note:

1. Down Payment

Down payment can be viewed as skin in the game. How much does the buyer owe vs. how much is the property worth? Most note buyers want to see at least 10% equity in a property. The investor wants to determine some sort of financial reason the payor would not just walk away from the property and stop making payments. The greater the initial down payment, the less likely a payor will want to risk their equity in the deal. Nevertheless, some note buyers are willing to entertain even 0% down payment, given the other factors of the note are suitable.

2. Interest Rate

The investor will also consider the interest rate at which the note was structured. A higher interest rate on the promissory note is more attractive to an investor, provided the buyer can afford the payments. The ideal rate is 3-6% higher than the current market rate, especially considering the fact that the buyer could not qualify for a traditional bank loan. However, investors are occasionally willing to consider zero or lower interest rate notes if the other criteria support the value of the note.

3. Mortgage Term

The terms include the payment amount, frequency, and the date for when payments are due in full. The mortgage may be fully amortized or interest only with or without a balloon payment. If there is a balloon payment, the investor will want to know that the buyer can refinance when the time comes, especially if the note is short term.

4. Buyer Credit Score

What is the payor’s current credit score? This is just one component the investor uses to determine the likelihood that the payor will continue to make payments. In this case, the higher the credit scores the better. However, many people carry back a note because the buyer could not qualify for a traditional bank loan. This may be due to medical history, self-employed status, or other factors. A lower range credit score can be offset by positive factors in other categories.

5. Seasoning

Seasoning refers to the amount of time the payer has been making payments. The general rule is the longer the better, as seasoning is one of the ways the investor determines the likelihood of the payer continuing to make payments. Usually 12+ months of seasoning is optimal, however, only one month is necessary. A shorter time frame will require the investor to consider other variables of the deal to minimize risk.