Many factors affect how much a purchasing company will pay for your mortgage note. These factors include the value of the property, as well as the payer’s equity, credit score and payment history. The value is set by the secondary mortgage note industry, which exists to allow third parties to purchase notes from those wanting to liquidate their asset.
Factors Affecting the Value of Mortgage Notes
When you start the process of selling your mortgage note it’s important to keep in mind that how much a mortgage note sells for mostly comes down to risk. Typically, the less risk involved in the note, the greater its market value.
Value of Property
One of the first things a note-purchasing company looks at is the value of the property that serves as collateral on the note. The current market value of the residential or commercial real estate listed on the note can increase or decrease the note’s market value.
Keep in mind, the amount listed on the mortgage typically is not the same thing as the current value on the property, or the amount for which the property was last purchased. Real estate values can fluctuate over time. If you’re not sure of the current value of your property, online resources such as Zillow can provide a rough estimate. During the note-selling process, a more precise quote is given.
A factor which affects property value is the actual type of the property. Typically single family dwellings maintain higher values than other property types like condos or manufactured homes.
Equity from Buyer
The equity the real estate’s owner has in the property factors into the value of the note. This includes the amount of the down payment, as well as payments already received from the property owner.
When a payer has invested a significant portion of his or her own assets into the real estate, the payer has a vested interest in the real estate and is less likely to default on the loan. Thus, a mortgage note with a significant level of equity from the buyer presents a lower risk.
The more equity the homeowner has, the more money a note seller is typically able to get for the note.
Property Owner’s Credit Score
The mortgage note owner’s creditworthiness does not factor into the sale of the note, but the property owner’s creditworthiness does.
The higher the credit score of the property owner, the higher the value of the note. More creditworthiness in the owner means the person purchasing the payments is taking on less risk. Because the buyer of the note is assuming less risk, that money is passed on to the seller.
A low credit score does not automatically mean the note can’t be sold. Other factors such as payment history on the note, and the payer’s equity in the property, can help in cases where a low credit score hurts. Still, a lower score means more risk and thus degrades the note’s value.
Payment History on Note
Payment history on the note also determines how much a mortgage note is worth. This concept is often described as notes either being “performing,” meaning having regular payments, or “non-performing,” which means the payments have not been paid on time.
Being able to show a strong payment history from the property owner can make your mortgage note more valuable.Most private mortgages are not reported to credit bureaus, and so the payments do not influence the payer’s credit score. Thus, positive credit history on the mortgage note can help compensate for a payor having a weaker credit score.
Recourse vs. Nonrecourse
If the payer on the private mortgage is a corporate entity, trust or nonprofit, it helps to have an individual listed as the personal guarantee of the payer. By having a guarantee, it means the note has recourse in the event the entity, trust or nonprofit stops making payments on the loan.
The term “recourse” means the note has someone with whom recourse could be taken in the event the loan is defaulted upon. Though it does not bar it from being saleable, a nonrecourse note has significantly more risk, which degrades its value.
Interest rate and the length of a loan also help determine the value of the note. A higher interest rate and shorter loan term make for a more valuable note.
Other note terms, such as a rider on the mortgage affecting the term, can also affect its value. For instance, some private mortgage notes have a balloon rider. This type of rider lets smaller payments be made for a time, with one lump sum due at the end of the term. This would be instead of evenly distributing the amount due over a series of payments. Any rider affecting the payment schedule can affect the value of the note.
Can Your Mortgage Note Be Sold?
Most mortgage notes are eligible to be sold. To be saleable, the note needs at least one of these qualifications: buyer equity in the form of a down payment, satisfactory payment history, or good credit on the part of the buyer. Once the loan is determined to be purchasable, the other factors affect the amount the note can be purchased for on the secondary mortgage note market.
Though these are the main factors taken into account when a company purchases a mortgage note, it’s a complex situation. The best way to know the exact value of your private mortgage note is to speak with a note-buying company.