Not all mortgage notes are created equal.
With so many different factors going into the value of seller-financed mortgage notes, it’s no wonder some are worth more than others.
One of the most significant value indicators? Note performance.
Payment Histories Indicate Note Performance
By now, you know that payment histories (especially verifiable payments) significantly increase the value of a mortgage note. In addition to you receiving monthly income, it also gives your buyer – and the note – credibility.
Not only does performance affect what a note buyer would offer to purchase your mortgage note, it could determine if they even want to purchase it.
Performing versus Non-Performing Mortgage Notes
Ideally, after agreeing to owner finance your home, the buyer proves to be a model borrower, paying every monthly payment on time for the required amount. Unfortunately, not every buyer follows this path.
Performing Mortgage Notes
When a buyer makes timely payments on or before the due date each month that makes your mortgage note a performing note. Hopefully, these come with verifiable payments as well, something that’s smart to setup from the start.
Performing notes are ideal for sellers, and also for buyers.
A timely payment history shows that the buyer is reliable and that they have a vested interest in the property. This makes it less likely the buyer will default on payments in the future or walk away from the property.
Sub-Performing Mortgage Notes
While performing notes are more black-and-white, there is a middle area in note performance: sub-performing notes.
When a buyer misses a payment the note doesn’t immediately go into the full non-performing category. If the missed payment is within 15 to 60 days, the label of sub-performing note often gets attached. At this point, it’s up to the seller or servicing company to reach out to the buyer to figure out a road to repayment.
Why this initial leeway? Maybe the buyer lost their job, is dealing with a loss in the family or has unexpected medical expenses — after all, we are all human and life throws unexpected curve balls.
This in-between time allows for the buyer to get back on track and is the best time for a seller to stay on top of the situation before the buyer gives up paying and defaults.
Non-Performing Mortgage Notes
It’s a seller’s nightmare, after agreeing to be the bank your buyer stops paying. Your income stops coming in, and your note stops performing.
A non-performing note usually means the buyer has defaulted for 90+ days and foreclosure is the next likely step. Whether they refused a repayment plan when the seller reached out, or they were unable to keep paying, the payments have ceased coming in.
Luckily, the seller isn’t out of options. They can always sell their non-performing note. While not worth as much as its performing counterpart, they can still get some money back from their seller-financed deal.
So, what makes note buyers interested in a non-paying mortgage note? If it’s not the interested income, what is it?
Note buyers have more experience getting buyers back on track to repayment. If they can’t work out a repayment plan with the buyer they are comfortable with the time and expense of foreclosure with the potential of owning the property at a discounted price.