Hello everybody. I would imagine this has been discussed before, but I can’t find a Search function on this forum. I’ve been toying with the idea of offering seller financing on my rehabs and then selling off the note at a discount. I’ve spoken to a couple of note buyers and they have similar requirements with regard to buyer down payment, credit score, % discount, etc. Typically, they would like to see at least 5%, preferably 10% down payment and a good (at least 600) credit score.
My question is simple. With this much down and a credit score like that, why couldn’t that buyer get regular financing? Even a self-employed person having to go stated income could get bank financing with those credentials.
I always thought seller financing was a way to get people with poor credit into a house, not those with decent credit. For poor credit I’ve been selling via lease/option and then providing credit counseling thru a mortgage broker I do a lot of business with. I’d prefer to just sell them the house and sell of the mortgage, but the discount is too high for buyers with poor credit.
I’m just trying to figure out what the advantage is. Any info appreciated. Thank you.
If you don’t want to be hit with a big discount when you sell the note you are going to need a note rate of atleast 15% and you will want to hold the note for atleast 6 months.
Here is an example of a “good” note:
100,000K sale price
80% bank financing @ 8% 30 year fixed…NO PREPAY.
20% Seller financing @ 15% interest only 2 year balloon, 2 year 1% Pre-pay penalty.
Assume:
taxes =$100/mo
Ins. = $40/mo
other monthly obligations $200
PITI =$979.90/month
Total monthly obligations = $1,179.9
REQUIRE:
DOCUMENTED GROSS MONTHLY INCOME OF $2,360.00
MINIMUM CREDiT SCORE OF 500
Hold the loan for 6 months and then look for an investor that will purchase the principal portion of the note.
You should be able to sell the principal payments on the note in month 6 for between 13K and 15K. If the buyer holds the note for the full term you should collect about $5,800 in interest + 13K-15K from the sale of the principal portion = 18,800 - 20,800.
I would not offer more than 20% financing and I would require the borrower to have a middle credit score of atleast 500 and a debt ratio no higher than 50%.
Also, if you are going to sell just the principal payments make sure that YOU receive the prepayment penalty since your the one keeping the interest portion.