Creating a Quality Mortgage Note

When using owner financing to help sell your property, creating a high quality promissory note and mortgage or trust deed is of primary importance. We strongly suggest employing the services of a competent attorney or title company to represent your interests in the sale and creation of the note and mortgage or trust deed. Here are some important steps to take:

Sale Price
The sale price should be nothing less than the property’s fair market value. There is no reason to discount the price if you are financing the purchaser. Don’t allow the sale price to be negotiated below market value – and then have the buyer ask you to finance the sale for them. It should be your goal to negotiate as high a sale price as possible.
Down Payment
The down payment is the purchaser’s initial investment in the property. The larger the down payment, the more motivated the purchaser will be to protect his investment. Consider carefully: Would it be wise to sell your property to a buyer who is unwilling or unable to financially commit himself to the property you are selling. It should be your goal to negotiate as large a down payment as possible.
Interest Rate
The interest rate you charge should be a function of the down payment, credit worthiness of the buyer and number of scheduled payments. The rate should be higher than the interest rates being charged by banks. Remember, the banks only advertise their best rates, and the buyer probably doesn’t qualify for them. Don’t be afraid to require at least 1% to 2% higher than local banks are charging. It should be your goal to negotiate as high an interest rate as possible.
Credit Worthiness
Banks are professional lenders. They don’t lend money without reviewing a credit report on the borrower and you shouldn’t either. Just like any creditor, you have the right to information that shows the buyer has an adequate source of income to pay the note obligation and has a good credit history. Don’t feel obligated to provide owner financing if you don’t feel comfortable doing so. If you do decide to move forward with financing the buyer and learn they have less than good credit insist on a larger down payment.
The amortization of a note refers to how many payments are scheduled. For most people it doesn’t make sense to create a note with a 30-year payback. Creating a term up to 15 years is more practical. Scheduling a balloon payment in the note is a method that shortens the term of the note without increasing the monthly payment required of the buyer. If you decide to schedule a balloon payment into the note’s amortization do so at a point when the borrower’s will have enough owner’s equity in the property to successfully qualify for the refinance loan they need.
Escrow Payments
Banks require monthly escrow payments for good reasons. It would be wise for you to require the buyer to make monthly escrow payments for taxes and insurance as well. While requiring more work, it will help prevent the undesirable situation where the tax and insurance payments are not being made.
Title Insurance
As the lender in seller financing, you should require the purchaser / borrower to provide you with a lender’s policy of title insurance. Every bank requires this. If you ever decide to sell your note a lender’s policy of title insurance will be helpful. Requiring the buyer to purchase the policy will save you the expense down the road.
Closing the Sale
It is very important that you have a competent attorney or title company represent your interests in the creation of documents and at the closing. As the seller, the financing documents protect your interests. Your attorney should prepare these documents. After the closing, be sure your new mortgage, deed of trust, contract for deed or land contract is recorded immediately to protect your first lien position.