The new Dodd-Frank/Safe Act is creating some many new variables in the Note World. At the same time it is creating some new opportunities resulting in an abundance of newly created seller paper. It is still unclear how it will be enforced or litigated, but to be sure it has dictated specific guidelines on how a note should be created.
The 10 things to consider when creating a note:
1. Have licensed loan officer under writes the paper (typically $500) just like would be done as if it was a traditional loan. Items to consider:
a. Current or reasonably expected income and assets (not the property of the loan
b. Current employment
c. Monthly mortgage payment (highest rate and amortization)
d. Monthly payments on all other mortgages
e. Monthly payments for housing costs (taxes, insurance, HOA, flood, condo fees)
f. Debts for alimony and child support
g. DTI or residual income
h. Credit history
2. Lender originates a Qualified Mortgage (QM) as defined:
a. Periodic payments
b. No negative amortization, no interest only, no balloon, 30 year amortization
c. No fees greater than 3% (assumes $100,000 loan)
d. ARMs (must be fixed for 5 years before adjusting)
e. Verify credit, income and debts
f. Maximum DTI of 43%
3. Have the note serviced by a accredited servicing company. The $18/month fee can be passed on to the buyer.
4. Other considerations:
a. Not a “creditor” if they finance less than 6 residential mortgages in a calendar year or more than 1 high cost mortgage (exceed APOR by 6.5%).
b. One Property Exemption (within 12 months) Only available to
c. Persons, Estates or Trusts.
1. Must own the property
2. Did not build or act as a contractor for the residence of the property in normal course of business.
3. No negative amortization and have a fixed rate for at least 5 years with ARMS having reasonable annual and lifetime limits.
4. Must be fully amortizing
5. Must determine in good faith that the consumer has the ability to repay
One may ask why seller carry back? Bottom line it opens up more opportunities for the seller. The Dodd-Frank bill has established tighter underwriting guidelines, therefore disqualifying some potential good buyers. Due to the recent economic issues, they may have a marginal credit report, but they have good paying jobs and a large amount of cash for a substantial down payment. This in itself creates opportunity. The seller on the other hand can list and expect to sell their home for 15% above market without the issues of a low appraisal or potential repair requirements as is the case many times with FHA or VA financing. With the Phoenix market now a buyer’s market, Days on Market are increasing. This process will attract a larger pool of buyers and the seller can expect to sell their property faster than the normal retail sale. When closed they will be creating a cash flow well above normal CD rates with a well collateralized asset. Later after six months of seasoning, the seller can market the note to a note broker or private individual, discounting the note 10-15% and become whole. The note buyer will then have a very strong 10% plus return investment. Or… the seller could sell a partial (the first sixty months of payments) and receive a good portion of the principle.
However, it is imperative that the seller follow the Dodd-Frank guidelines noted above if they have any plans at all to sell the note.
Overall, seller carry is a tremendous opportunity for both property owners and real estate listing agents to market for property listings giving the property owner a real measurable benefit.
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