Proper and detailed due diligence is a must in purchasing a quality note. The note overview provided for each note in the note vault is a summary of what our underwriting has determined to be important points to consider when purchasing note. Let’s look at them line by line.
TYPE–means the type of security. It could be a land contract, mortgage or deed of trust
CFD — means Land Contract, Contract for Deed or Agreement for Deed all of which are synonymous.
VALUE–is the value we have determined usually by a BPO(broker price opinion), sometimes referred to as a CMA(Competitive Market Analysis)
CURRENT BALANCE–is the current loan balance some times referred to as UPB–unpaid principle balance
ORIGINAL BALANCE–is the original when the loan was originated
P & I–meant the amount of the monthly principle and interest payment
ORIGINAL TERM–reflects the # of months of amortization when the loan was originated.
REMAINING TERM–reflects the # of remaining months of amortization.
INVESTMENT TO VALUE–reflects the amount of money invested divided by the property value or BPO amount. We consider a good range to not exceed 65%.
LOAN TO VALUE–reflects the amount of the existing loan balance(UPB) divided by the property value or BPO amount. We feel the lower the better, definitely less than 60-65%. The lower the better. The lower the better the equity position in the event something goes wrong with the payments.
INTEREST RATE-is the amount of interest the payor(borrower) is paying.
EFFECTIVE YIELD-is what is your rate of return based upon how much one is paying for the loan compared to the actual remaining loan balance.
SEASONING-reflects how many months the borrower has been paying since the loan was originated.
PAYMENT HISTORY-is a record–a spreadsheet of the payments which include due date, paid date, late fees, taxes and insurance payments and multiple other items. As long as the borrower is current 11 out of 12 months, it is considered to be a good history. As long as the borrower pays within 30 days of the due date even though there may be a late fee charged, we consider that to be on time payments.
ACH-means the payments are automatic bank drafts from the borrowers account. As lenders we really like that typo of borrower.
PAYOR—another word for borrower
DODD-FRANK FRIENDLY–refers to the Dodd-Frank Act which was effective January 10, 2014. Any loans originated after that date require underwriting by a loan originator.
PROJECTED RENT–reflects what that typo home rents for in the area. We use that as a benchmark for the payor–meaning we like to see their total payments to be less than a typical area rental. They have to live somewhere. If rents in the area are much more than their monthly PITI, it is less likely the payor will default.
For additional information on due diligence go to this posting.
Go to our NOTE VAULT for our current performing note inventory.