Posted by Michael Morrongiello on March 30, 2000 at 12:10:32:
In regards to your questions regarding seller financing;
Question #1 - Why would someone with “A” credit rating use funding two points higher than current mortgage interest rates for conventional or other financing?
A- It happens more often than you think. There are plenty of buyers who are NEWLY self employed, may have excessive debt to income ratios, may be new on their jobs, have had a prior bad experience dealing with a more traditional mortgage lender, or who simply don’t want to be put under a “microscope” when it comes to obtaining their financing. To these people “How much down? and How Much per month?” and the ease of getting them into the home is FAR more important than obtaining the very lowest interest rate in the marketplace.
Just the other day I was presented with a newly created note where these self employed buyers who owned a construction company wanted to purchase the home. They had a 700+ credit score and they readily accepted a 12% interest rate on the seller financing offered.
What you are selling them on is that you CAN get them into the house fast and under a streamlined process. Later on if they decide to refinance to a lower rate loan they can do so since there is NO prepayment penalty in the seller financed loan.
If they want to run the “gauntlet” to obtain a better rate let them, however you will find that many buyers will welcome the opportunity to get into the home FAST even with an Off Market interest rate where along with that financng there are NO points, NO application fees, NO prepaid escrow setup fees, and none of the variety of other lender junk fees.
Question #2 - Basis for using 1st and 2nd (plus significant Down Pymt.) for lesser credit is ???
A- When there are lesser credit & Lower credit score borrowers most lenders and note funders will want to limit their exposure into a property to a comfort level that will be commensurate with the credit. Depending on how severe the credit derogatories are a lender may wish to stay at no more than 65%, or 75%, or perhaps up to 80% (ITV) investment to value.
If you take back a 90% LTV note and the buyers credit really only qualifies him for no more than a 75% ITV exposure then no matter what the terms of that note are, you are looking at least a 15% discount on the note so that note funder can keep their exposure to what is warranted.
However if with that same debtor you START the note’s (LTV) loan to value threshold out at 80% LTV and the credit calls for no more than 75% ITV then you now have limited the discount to around 5% off the note’s balance. The remaining equity you would have as the seller you would take back in the form of a 2nd lien note.
Now ask yourself this question? : Whats better a 5% discount off the note balance or a 15% discount? As a note funder if you want to give it to us, my firm would gladly purchase the same note at the larger discounted amount if it was incorrectly structured at the time of its creation. Deal STRUCTURE that ties in with the proposed payors credit and exposure risk is crucial to mitigating a note’s discount if and when it might be coverted for cash liquidty
I hope the above clarifies some your questions.