Want top dollar when selling mortgage notes?
Payment Histories Increase Note Values!
Accurate payment histories increase note values. Detailed records of the payments received on a mortgage note are essential to know how much the buyer still owes.
This also establishes a record of their payment habits. When selling a mortgage note, the buyer will want to see this history. It needs to be verifiable. That is why is it best to use a third party processor. Today these services are very affordable.
There are two main ways to keep track of payments on seller-financed mortgage notes: 1) outside serviced, or 2) seller direct.
Professional Mortgage Note Servicing
The first and easiest way is to let a professional handle it. The payments are made to a third party servicing agent that keeps track of the balance, sends out late notices and sends the money along to the seller. They will also send out the annual 1098 Mortgage Interest Statements and can hold original documents in safe keeping.
They can also handle wraps. They would then pay both mortgages and disburse the funds to appropriate parties. When closing, it is important to get an extra payment from the buyer so that the sellers mortgage can be paid ahead.
The third party processor can also collect taxes and insurance with each payment, hold the amounts in escrow, and then forward payments to vendors.
The DIY Approach to Collecting Payments
If a seller chooses the “Do-It-Yourself”’ method over a third party pro they will need to follow these steps:
1. Place original note and other original documents in a safe deposit box.
2. Make a copy of each check or money ordered received. Accepting cash is not recommended since it is hard to verify the payment history without a paper trail.
3. Deposit the payment and keep a copy of the bank record of deposit. It is best to deposit each payment separately rather than combining with other checks.
4. Create a ledger or spreadsheet reflecting the date and amount of payments received.
5. Calculate the amount applied to interest, principal, late fees (if any), and the resulting principal balance. An amortization schedule or financial calculator can be helpful. Once calculated, record in the ledger.
6. Send out an annual statement to the buyer or payer along with the IRS1098 Mortgage Interest Statement.
7. Verify the real estate taxes and property insurance are being kept current. Consider establishing a tax and insurance escrow where the buyer pays 1/12th of the annual amount into a reserve account each month.
8. Send collection letters as necessary for late payments, lapsed insurance, or delinquent real estate taxes.
Why Private Note Buyers Want Payment Histories
When an investor agrees to purchase a note they will request a payment history. A verifiable payment history can improve the value of a note as it provides proof of timely payments. A payment history is considered verified when it is either provided by a third party or is backed up by the documents and records outlined above. These payment histories increase the note value.
Unfortunately, many sellers fail to keep track of the payments received. When they go to sell the note, contract, or trust deed they try to recreate the history from memory. Without any proof of payments received, a note buyer has to go on faith. Sometimes a payment history affidavit can substitute for a payment record but it still doesn’t add the value of verifiable proof.
Protect the value of your mortgage note! Set up a payment tracking method today. Put together the list above if you didn’t do it before and put everything together in one place.