The main thing to remember is that “Guidelines” are just that “GUIDELINES” - they are not carved in stone. There are other variables that can also create offsetting positives or negatives when underwriting a note purchase deal.
Here are some general guidlines to consider when dealing with a “seasoned” note (1month or more of payments), on an owner occupied Single family home sold with a minimum 5% cash down payment from the buyer:
FICO SCORE = Range of ITV Exposure
650 + = 85%-90%
600-649 = 80%-85%
551-599 = 80%-85%
525-550 = 75%-80%
A 10% cash down payment is perferable to making exceptions
Strong employment stability is another offsetting factor to consider
The note interest rate should be in the 10% -11% range on the higher credit score customers and in the 11% -12% range for the lower credit score customers.
Simultaneous closings of notes with NO payment history on them may result in a sligntly lower ITV exposure level because of the increased risk.
These are Gross pricing guidelines where a fully processed package is delivered for underwriting
NOTE: These are the guidelines that my company uses to look at files. I cannot speak as to what other funders offer.
I am a rehabber and have started to do owner financing to turn my projects faster. I recently sold a house to a buyer who could not get financed anywhere so I created a note and sold it immediately. I had a note broker shop it prior to closing the sale of the house and we found a company willing to buy the note on the following terms:
appraised value of house 39k
selling price of house 38k
cash down payment 5k
new note 33k at 12% 30 yrs
cash offer for note 27k (82%)
After receiving this offer we asked if any changes of terms would increase the cash payment, ie. 15 yr term vice 30yr, 15% int vice 12% int, adding a prepayment penalty, adding a ballon after 7 to 10 yrs. No changes offered would affect the price they were willing to pay for the note. They didn’t seem to care if the term was short or long. This has confused me, I am trying to learn how these notes should be structured for best resale and was under the impression that shorter term and higher int rate was better. I must add that this buyer was pretty weak on the credit score (around 500) so I am not complaining about the payoff (I had very little in the house and made my investment and profit from the down payment). I’m just trying to see if there was ANY better way to put a note like this together for immediate sale. Thanks for your patience and advice.
Mike:
With such a weak credit score buyer, I suspect that it was a question of exposure rather than any other “tweaking” that could have been done to make this note more valuable. I would fund a deal like yours at no more than 75% (ITV) investment to value so as to limit my exposure into the property. No matter what you do to the note in this instance would sway me to budge from that threshold.
Normally, you are on the right track in your assumptions that “shorter term, higher interest, etc.” create a more valuable note. The other item that creates more valuable paper is payment SEASONING. With some payment history that can be documented on a note especially with a blemised credit payor, providing the payors performs, the perception of risk is that the note becomes less risky.
Hope this helps.
Warmly,
Michael Morrongiello
PS. I am glad to see your using seller financing as a tool to move your properties fast.
Michael, thanks for the explanation, I hadn’t considered the funders exposure or ITV as part of their
reasoning. I just read your response to Randy’s post also. That helped explain a lot. Question for you, have you considered posting a general guideline such as,
500-550 fico 75% ITV
550-600 Fico 80% ITV etc, etc.? or would something like that be too limited? ( or a trade and competition secret? )
p.s. I have followed many of your posts since discovering this site and have found them very helpful.