Being prepared when structuring a private residential mortgage note for re-sale.

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Structuring a Private Residential Mortgage Note for Resale: Be Prepared


Overview

This guide explores essential elements in structuring a residential mortgage note for resale. Remember, it's just a starting point. For specific questions about your state's mortgage laws, consult a licensed mortgage broker or attorney.

Key Considerations


1. Secure a Significant Down Payment
- Aim for a 25% down payment as it's ideal for Note Buyers. However, you can work with 15-20%. Anything below 15% poses significant risk, and under 10% may make the note unsellable.

2. Evaluate Borrower Credit
- Conduct a credit check on the borrower. A FICO score of 600-700 is desirable. The lower the score, the higher the down payment required. Keep a copy of the credit report for the Note Investor.
- Understand the borrower’s Debt-to-Income (DTI) ratio. It should not exceed 45%. Calculate this by comparing monthly debt to monthly income.

3. Order a Property Appraisal
- Conduct an appraisal prior to submitting the note. This provides accuracy in bids and ensures a hassle-free transaction. While optional, it greatly enhances the likelihood of a smooth sale.

4. Set Favorable Interest Rates and Terms
- Opt for a high interest rate with the shortest possible term that the borrower can afford.

5. Limit Loan Duration
- Keep the loan term under 10-15 years. Loans over 12 years generally face higher discounts. Note Investors prefer 5-10 years, if feasible.

6. Incorporate a Prepayment Penalty
- Ensure your agreement complies with state regulations regarding prepayment penalties.

Conclusion

These steps are intended to guide you through structuring your mortgage note for resale. For any legal questions specific to your state, consult a licensed professional. Being well-prepared can mean the difference between a smooth transaction and a difficult one. Good luck!

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