I'm Freaking Out Over This Economy and Need To Sell My Note Now!

Just like the big banks and mortgage companies, private mortgage note holders are getting caught up in this terrible real estate market. And unlike a bank that has a portfolio of loans to spread their risk on, a private mortgage note holder typically has only one note. Like the note seller who called me to buy his note only to find out the mortgagor's (who had been paying on time for a year) credit had dropped from 650 to 520. Boy, was he shocked. He asked me "Can I still sell my note? My answer was, unfortunately no or rather not for a price you would want to sell a note for. The good news for other note sellers is they can minimize their risk 4 ways, including eliminating their risk altogether.

1. The first is to require a good down payment (at least 15% and preferably 20% or more). If I were planning to sell my note after the sale, I would never accept less than 15% down.
2. Secondly, pull credit on prospective borrowers and require a score of at least 660. And yes, there are prospective buyers with very good credit scores; particularly self-employed buyers that can't produce enough income from tax returns or that just don't want the hassles of applying for a traditional mortgage today. It also might be a good idea to ask how the borrower makes a living as this might reveal a business or job that would be considered risky or very volatile.
3. Third, create a note that has an attractive interest rate with either no balloon or at least a balloon at least 10 years out, otherwise a mortgage buyer won't be interested in buying the note.
Lastly, the ultimate protection for the note holder is to sell a note after a few payments are made (what is called seasoning). After all, that's what most big mortgage companies do. Why sell my note at a discount, you ask. Well, the discount on the sale of the note can be worth it by eliminating all the hassles of managing a private note (monitoring the borrowers taxes and insurance, documenting payments, 1099s, etc.) as well as make sleeping at night much easier.