As a buyer of private mortgage notes I continue to be surprised at not only the terms of many owner financed notes but the pretty loose way they were permitted to be created. And while I do understand how a anxious home (or commercial property) seller could readily fall into the ‘anything just to sell the property’ trap, many of these tips will not effect the sale but will still help protect your newly created financial asset – the private note.

Below are some basic steps you might want to want to consider when owner financing to 1) Create a more valuable and marketable private mortgage, should you ever need to sell your mortgage and 2) Do more to protect yourself from future financial loses.

Require at least a 10% down payment, even if it has to be in 2 or three installments. A home buyer with no “skin in the game”, as seen by the default rate on 100% traditional mortgages is a much more serious risk than one with a large down payment on the line. Pull credit on the borrower. If you can’t pull credit yourself, ask the borrower to provide you with a recent credit report from all 3 bureaus including scores. Keep a copy of the report, particularly if you plan on selling the private mortgage in the near future. Even if you don’t turn a home buyer down because of poor credit because you really need to sell, you can often use the below par credit to demand a better interest rate. And don’t forget, there may be perfectly legitimate reasons for the problems with their credit such as a job loss or illness. Did you know that medical bills are the number one cause of Bankruptcies in the U.S.? Even people with good income can be wiped out if they have no insurance. I’ve seen many people with health insurance take a serious hit in credit scores because of their insurance company rejecting some reimbursements or paying really slowly. Use a good lawyer or title company to handle the closing and be sure the mortgage note allows you to pull credit as well as sell the mortgage note in the future. A note seller approached me recently to sell a note, only to find out the note had a “non transfer” clause. You have control over this process. Be sure the note is created in your favor.

By taking these steps when owner financing a home or commercial property sale, you dramatically lower your chances of a loss down the road.