As the housing market recovers from the chaos of 2008 and 2009 you’ve probably read more about seller-held mortgage notes and deeds of trust. What are they? How do they work? DM Direct Funding is a Florida mortgage note buyer with over a decade of experience valuing and administering seller-held mortgage notes. According to DMO’s Doris O’Halloran, seller funded mortgage notes and trust deeds are important alternatives to the mainstream mortgage market. She notes that “A properly administered seller-held note serves different clientele for more flexible terms without adding risk to the borrower or lender.”
In a seller funded note, the property seller covers some or the entire mortgage loan. The buyer makes payments on that amount plus interest to the seller. That way, a seller-held note serves as an investment for the lender, who profits from the arrangement in much the same way as the bank might in a traditional, institutional mortgage or trust deed.
Seller-held notes are normally uses to offer non-standard (but still legal and practical) loan terms. For example, seller-held notes often have shorter terms, as the seller doesn’t want to wait decades for payments or deal with the property passing through multiple hands or liens. A short term might finish with a balloon payment to take care of the remainder in a lump payment. The seller might also adjust the interest rate and other features, though this should all take place under the guidance of real estate experts, including a real estate lawyer and someone with the competence to properly value the real estate in question.
Seller funding can also serve the needs of non-traditional borrowers. “There are many people who don’t match the one size fits all bank profile of a qualified borrower, but who still represent safe prospects for mortgage loans,” says Ms. O’Halloran. For example, self-employed individuals often find it hard to find suitable mortgages or trust deeds, no matter how successful their businesses are. Institutional guidelines may also ignore job stability, expected cash windfalls such as investments, and many other factors that contribute to financial stability in an unconventional fashion. Even unconventional borrowers should be well-qualified for the loan, however. Again, expert advice is recommended.
Thus, while a seller-funded note occupies an important niche separate from mortgages administered by banks, they require care and attention. The seller should have specialized legal advice on hand, proper valuation of the property, and needs to thoroughly investigate the borrower. Once these hurdles have been passed the note will not only serve as an effective investment, but can be used as a cash flow source in case sizeable expenses crop up. DMO is a mortgage note buyer that purchases properly administered mortgage notes, providing cash in return – but the possibility of selling your note requires that it be properly written and administered in partnership with expert advice and a reliable borrower. Once you have these, you have maximum flexibility to use it as an extended investment or a cash flow source.