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When the buyer is unable to secure conventional financial and the seller is willing to carry back a portion of the sales price of a property, a private mortgage note is created. Below are the basics of creating a secure and saleable seller financed mortgages and notes:

• Sell the property to a buyer who will owner occupy the premises.
• The buyer's lowest credit score should be greater than or equal to 580.
• The property should not be sold to a relative or an acquaintance.
• Sell the property utilizing an escrow or title company as a third party processor
• It is very important to get a legitimate title policy and insurance that is equal in value to the sales price.
• The mortgage (1^st lien position) should not be more than 85% of the sales price.
• This mortgage should be secured by a Mortgage Deed or Trust Deed on the property.
• Ideally, the down payment should be greater than or equal to 15% of the sales price.
• In the event that the buyer does not have cash to put down more than 10% and the property value is higher than expected, you have the option to carry back two notes: The first position note at 80% of the sales price and the 2^nd position note at no greater than 10% of the sales price. This is referred to as a 80-10-10 arrangement (1^st position note: 80%, 2^nd position note: 10% and Cash: 10%.
• The terms of the note should be clearly stated. A good note should contain the following:
  • The date when the transaction was executed
  • Full names and addresses of the buyer(s) and the seller(s)
  • Full address of the property in question
  • The first payment date of the mortgage note
  • The maturity date of the mortgage note
  • The term of the note. Typically, a note is amortized over a period of 30 years even if the actual term is less than that.
  • The interest rate applied to the note. Usually, the interest rate for seller financed notes is between 8-12%
  • Pre-payment penalty for the first five years
  • Monthly Principal and Interest payment on the note
  • Considerable and detailed provisions for late and default payments on the note
  • The total down payment paid by the buyer
  • The note should always be notarized and both the buyer and the seller should have an original copy
• A detailed record of the note and each payment has to be kept. That could be done by saving a copy of the payment check showing the bank cancellation stamp and/or by having a separate bank account for the note.

Bhavna Jhaveri is a notes investor and has multiple years of experience in the real estate industry. Our private mortgage note buyers are always willing to give tips/advise on creating or selling a note.

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