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Four most important factors when evaluating a mortgage note value

When liquidating a note, it’s important to get the biggest lump sum of cash possible. To do that you must understand the four most important factors in determining that value. The four criteria are equity, the Payor’s credit score, the number of payments made, and the note payment history.

Equity is created in three ways:

1. When a down payment is made
2. As monthly payments are made
3. As the property appreciates

Generally speaking, Note Buyers look for at least 20-percent equity in the property. This minimum level of equity serves to help protect their investment.

Many Note Buyers will consider the Payor’s credit score closely because it can help predict the note’s potential for foreclosure. Credit scores are indicative of performance with past and current debts, so it makes sense to assume that a Payor who has been responsible in consistently paying back other debts will be a good note Payor as well.

With seller-financed deals most Payors will not have stellar credit, but most buyers still prefer Payor credit scores above 575.

A note’s “seasoning” describes the number of payments that have been made overall. The more payments that have been made, the more money the Payor has invested in the property; therefore, default is less likely. Most Note Buyers look for 12 or more completed payments, but exceptions are made for notes with a large amount of equity or a Payor with a high credit score.

The note payment history takes any late payments into consideration. Understandably, most buyers prefer a consistent on-time payment history. Perfection isn’t required or expected – one isolated occurrence of a missed payment a few years ago won’t necessarily dissuade a potential Note Buyer. Sufficient equity also serves to counterbalance a history of occasional slow payment.

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I help real estate buyers and seller with creative financing with seller financed trust deeds and mortgage notes.

Many of your clients have trust deeds, mortgages notes, judgments, structured settlements and other forms of IOUs. And, 9 times out of 10, they wish they had the cash and not the income from these IOUs.

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