What to include in an owner-financed mortgage note contract?

Owner financing, often known as seller financing, is a way of financing a home in which the home’s
owner holds the Mortgage Note Buyer’s loan. Seller financing, also known as seller carryback financing:
is a type of owner financing (because the owner “carries back,” or holds, the financing). It functions
similarly to bank financing, except that the buyer repays the seller by making monthly payments over a
set period of time at a set interest rate and terms.

The buyer is responsible for paying the seller the total sales price after the Mortgage Note Contract is
completed. It’s important to note that the seller also charges interest, which is usually greater than what
a typical mortgage would charge. The title is normally not transferred until the owner has paid full
payment.

Definition

Owner financing, usually referred to as seller financing, allows Mortgage Note Buyers to pay for a new
house without using a standard mortgage. Instead, the homeowner (seller) finances the purchase,
sometimes at a higher interest rate than current mortgage rates and with a five-year balloon payment.
A mortgage note is a financial document that outlines the terms of a lending agreement for the
acquisition of real estate. A home or property seller holds a private mortgage note. In some cases, the
seller may be the sole owner of the property and might give the buyer their financing.

What to include in an owner-financed mortgage note contract?

The length of the loan, the amount of the down payment, the interest rate, and whether or not there is
a balloon payment are all decisions made by the buyer and seller. Some sellers are set on certain terms,
while others are willing to negotiate. Follow these guidelines to lessen the risk associated with Mortgage
Note Contract language drafting:

Down Payment

A down payment is a sum of money paid by a Mortgage Note Buyer to the seller to demonstrate their
investment and enthusiasm for the property. This money goes toward the purchase price, with the rest
of the cost being financed. In 2018, the average down payment on seller-financed residential properties
was 19 percent. Higher down payments were found to minimize delinquency and default risk in a 2017
study done by Black Knight and the US Department of Urban Housing and Development.
A larger down payment demonstrates that the buyer has “skin in the game,” implying that they are less
likely to default or stop paying. A down payment of at least 10% to 30% of the entire price should be
specified in the Mortgage Note Contract. Because it builds more equity in the note right away, 20% or
more will fetch you a better price.

Amortization

This is the amount of time the Mortgage Note Buyer will pay back the loan. It could be five, ten, fifteen,
twenty, or thirty years. While 30-year mortgages are occasionally utilized in seller financing, shorter
terms, such as five to ten years with a balloon payment at the end, are more frequent. Even if a balloon
payment is agreed upon in year 10, the loan can be amortized for 30 years to keep the buyer’s monthly
payment low while increasing the seller’s interest collection.
Depending on the amortization tenure, the borrower may also face a significant lump-sum payment at
the end of the loan term. The Mortgage Note Buyer either makes the balloon payment or secures a
mortgage refinance and pays off the sellers with the proceeds of a new loan after the amortization
tenure. In the Mortgage Note Contract, make sure you specify that a short amortization of fewer than
15 years will be used. If you want to keep the amortization greater than this, add a 7-10-year balloon to
a 20-year amortization.

Owner-occupied property

Before or after the sale, be sure the property is not unoccupied. An unoccupied home always expresses
the impression of being unfit for habitation. The most advantageous quote will be given to an owneroccupied property, as this indicates that the owners are happy with their current situation.

Personal Guarantor

A limited liability corporation is a type of private limited company that is unique to the United States. It’s
a business structure that combines a partnership’s or sole proprietorship’s pass-through taxation with a
corporation’s restricted liability. If the borrower is purchasing the property as an LLC, have a personal
guarantor sign the note.

Lenders frequently request a personal guarantee, while it is not always needed, as further assurance
that any money they lend you will be repaid. A personal guarantee is a promise given by a person or an
organization to assume responsibility for another party’s debt if the debtor defaults.

Keep your Credit score above 650

The average FICO® Score is 704, which is slightly higher than the 650 scores. FICO® Scores of 650 or
better are obtained by 70% of consumers in the United States. Late payments (30 days or more past
due) and collections accounts are frequently listed on credit reports of people with a fair credit score in
the Fair range, indicating that a creditor has given up trying to recover an unpaid debt and sold the
obligation to a third-party collections’ agent. A credit score of 650 is quite near to the 670-739 range for
good credit. A borrower with a credit score of at least 650 will assist you in getting a better deal.

Avoid Cash Payments

Do not accept cash payments from the Mortgage Note Buyer, whether it be a down payment or a
monthly installment. Use Checks, Mortgage Notes, Money Orders, or Direct Deposits instead of cash
when dealing with the buyer. In banking, a direct deposit is when a payer deposits money directly into a
payee’s bank account. This has several advantages to paying with cash.

Try to have a Deed Of Trust

Rather than a Contract for Deed, try to have a Deed of Trust, Mortgage Note Contract, or Land Contract
can be used to secure the loan because a Mortgage Note Contract for Deed must be converted to a
Deed of Trust (before closing). If you intend to sell the mortgage note later to a mortgage note buyer,
this will save you time and money.

Conclusions

A seller-financed property is a viable alternative to a standard bank loan. The most significant risk for
Mortgage Note Buyers getting into a seller-financing transaction is how payments are tracked. If the
seller manages the loan, their records may not appropriately represent the outstanding balance or the
most recent payment. While this sort of funding can benefit both parties, it does need both parties to
sign a legally binding agreement. On the other hand, owner financing can be an effective approach to
construct a financing arrangement that is tailored to your specific needs.