Any investor or note buyer looking to purchase a private mortgage is asking two big questions…
1. What is the likelihood of the payments continuing?
2. What happens if the payments don’t continue?
To answer these questions, note buyers look at a variety of factors.
Will the buyer keep making payments on the mortgage note?
The “likelihood” of the payments continuing is really based on what kind of stake the buyer has in the property.
For example, if the buyer placed a large down payment on the property (say 20% or more), then it is more likely the payments will continue. In the event the buyer cannot make his or her payments, they are in a better position to sell the property (and payoff the note) then give up that equity and let the funder just take it back.
The same is somewhat true for someone who has been living in the same property for some time (seasoning). If the buyer has only lived there for a couple of months, they are not as emotionally attached the property. However if they have been living there for five to ten years, they are more emotionally invested. They have probably made some improvements and have memories in that home.
How a buyer has made other payments in the past is also an indicator of how timely they will be on making the note payments. For this reason an investor will look at a credit report on the payer to find out their payment habits and history on other debts.
Where does the note buyer stand if the payer stops making payments?
In the event of the payments “not continuing”, the investor is going to look at the value and foreclosure process.
Is there equity in the property? How much does the funder have in the note deal vs. how much can they sell it for (ITV or Investment to Value)?
For example, if the property is worth $100,000 and the funder is only in the deal for $60,000 – it is very likely they will get their investment back out of the deal. They can sell the property for more than $60,000 or maybe sell the property for $100,000 and carry back a whole new mortgage note.
Additionally, it will matter what the foreclosure laws are where the real estate is located. Some states make it a very long process to take back the property – even though the buyer has stopped making payments. This extra “time” will cost the note buyer money and is something to consider when bidding on a note.
What is the likelihood of the payments continuing and what happens if they don’t continue?
A funder will look at answering both these questions when determining how much to pay for a note. Keep them in mind if you are going to broker an existing deal or create a note for potential sale at a later date!