Regardless of how much credit you extend, it is wise to vet a buyer for seller financing, to be sure they will pay you. This is true if you are talking about a mortgage or if you are wrapping an existing mortgage on the home. We will explore some tips to improve your odds of timely payment. This is also important because if you are doing a wrap or all-inclusive mortgage (your bank loan stays on the home), there is the slight possibility the buyer will be forced to refinance to avoid a default caused by your mortgage lender.
In financial matters, borrowers are creatures of habit. Ask for a recent credit report. If the buyer has a good credit score and a history of paying creditors on time, chances are they will treat you the same way. The inverse is also true, if they do not pay on time, expect the same when they owe you money.
Usually, the buyer’s financial condition is none of the seller’s business. That changes when the seller becomes the lender. Ask for recent bank and investment statements to show that the buyer has staying power. Reserves are usually tapped before a buyer risks defaulting on their mortgage.
Ask for pay stubs or tax returns. A borrower’s so called “back-end” debt-to-income ratio should not exceed about 36%. To calculate it, add the mortgage payments (at current interest rates), property taxes, child support or alimony, fire insurance, car and credit card payments and homeowner’s dues and divide the sum by the buyer’s gross income. If the ratio is well above 36%, the buyer might have a tough time refinancing to pay you off. If the buyer’s credit score is stellar, or reserves deep, they might qualify for a slightly higher ratio.
When you vet a buyer for seller financing, one key factor is the loan-to-value ratio, which is computed by dividing the mortgage amount by the home’s value. While banks might go up as high as 90 or 95 percent, you should stay well below those limits. A safe number is 75% or less. That means the buyer must have at least 25% of the purchase price invested, with “skin in the game.” The higher the investment the less likely a buyer will default and risk losing it.
If you need help to vet a buyer for seller financing, ask your Realtor®, financial advisor, or mortgage professional.
If your team needs loan documents for seller financing, look no further than DossDocs.com. DossDocs.com provides a do-it-yourself solution in all 50 states for $499 per transaction. You simply answer a few questions and receive your documents instantly. The forms are based on the Fannie Mae format, the national standard for home loans. If you make a mistake, you can re-do the documents at no cost. No registration is needed. You can use the program yourself, or have your real estate agent or lawyer do it for you.
[1] Dennis H. Doss, is the Founder of Doss Law, LLP and a 47-year veteran in mortgage law. He is a frequent expert witness in mortgage cases, a frequent speaker at industry events and the creator of DossDocs.com, a nationwide loan document company.
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