Owner Financing

9 Replies

Can someone give me some insight into seller financed deals as far as loan servicing goes?  Do seller financed deals get serviced through a bank or another financial institution?  I am curious how payments on an owner financed sale will show on credit reports.  

I ask because I am negotiating an owner financed sale, and will purchase the property through an LLC. I would like to build credit with the LLC to reefinance in the future. Thanks!

Hi Kelly. I have came across owner financing a couple of times in my reading. Correct me if I'm wrong BP. Owner financing is basically a contract agreement between buyer and seller that the seller will take payments whether it is a fixed number or payment plus interest, whatever terms are worked out between buyer and seller. These terms can be shorter and a agreement can be worked out where buyer can later transfer "mortgage" to traditional financing. The deed is transferred to the buyer and the owner becomes the "lender". Buyers may benefit from less stringent qualifying and down payment requirements.

Hope I could help a little :)

Originally posted by @Kelly Williams :

Can someone give me some insight into seller financed deals as far as loan servicing goes?  Do seller financed deals get serviced through a bank or another financial institution?  I am curious how payments on an owner financed sale will show on credit reports.  

I ask because I am negotiating an owner financed sale, and will purchase the property through an LLC. I would like to build credit with the LLC to refinance in the future. Thanks!

Hi Kelly,

Loan Servicing companies such as 

http://notecollection.com/about-us

will collect the payment from buyer of seller financed home and send to bank.

Building credit for your payment on time you would need to contact the servicer.

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Kelly, search on BP for "loan servicer" discussions. There are tons of them available and you need to shop for services.

Concerns about establishing credit in an LLC name is a bit over done for small investors, under $1 or 2 M in assets, you aren't going to hit Dunn and Bradstreet. You'll also be personally guaranteeing mortgages made with institutional lenders and it's your personal credit that carries the weight.

Troy was warm, but there are installment contracts and there are mortgage or note a deed of trust transactions where you take title. You need to take title and give a security interest in the property purchased.

Now, some deals are too thin to pay servicing costs, note income just won't carry the expense. In those case the seller takes on a huge liability to conform to collection practices, might  have an attorney actually do real collection requirements. Payments can be sent to an account that you have access to the records, a bank may allow you to be on a joint account but don't sign a signature card, that means you can't withdraw funds, but if a seller dies, you'll have some claim and control over the account, not just a TOD.

When you refinance, you'll need to show payment that cleared, the date a check is written is not a payment date, the draft must clear to have payments received.

Don't ask a bank to service a note, they really can't as it is not their note and servicing notes of others is a different game, unless they are a servicer too. Finding an escrow account manager will be harder now after Dodd-Frank and other legal changes, such as a title company.

Guess I need to post someplace an easy servicing arrangement for these small notes.....later  :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thanks @Bill G.  This is exactly the info I was looking for.  I guess Im not so much concerned about building credit as much as being able to refi in 5 years.  Thanks for all of the help.

I love owner financing as an active buyer and use it every chance I get. I have never had an outside servicer handle it, I always send my payment direct the the seller/lender. One thing that I have found is that if you are borrowing smaller amounts, say less than $ 500,000, maybe more, is that you will likely be working with a smaller local or regional bank when it comes to refinance and they will likely hold that debt in their own portfolio. My experience with portfolio loans when I refinance is that the lenders are looking at tax returns to verify income from the subject property, rent roll, how long I have been on title, and my personal credit score. All of my properties are titled in an LLC, by the way. Every once in a while, they ask for copies of checks used to make payments, but that isn't common, at least with the lenders I have worked with.

As you can see, there isn't much importance in my experience on having payment history reported to any credit reporting agency.  Protect your personal credit report and keep your score respectable, take care of the asset, manage it well, and buy it right.  Refinancing should be pretty straight forward.  Find local banks that offer portfolio lending and start talking to them directly to get a good idea of what they will look at down the road.

Kelly, investor A is buying from investor B who is financing the deal. Later, you go to Gold Pot Bank, they do business with investor B and know him. A written verification of mortgage payments is mailed to B and he fills it out, Gold Pot might accept that as any representations that seller makes as to payment history carries legal weight with the bank.

Tax returns shown ability to pay, not timely payments.

Lenders that can not accept the seller's word for timely payments (the seller has a vested interest in the loan being approved, they get their money) must verify payments somehow. Cancelled checks will show the date payments cleared. If your seller tosses your check on the seat of the car, it gets lost, he fails to deposit it on time, you get a late mortgage payment! Late payments within 12 months can keep you from refinancing!

This is why a clearing account needs to be used. Never trust a seller to account for your credit history, being individuals, they can be crooks, but they also die, become incapacitated, got to a hospital, get divorced, take bankruptcy and get sued with all of these matters effecting how they may care for your accounts. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Bill makes good points.  I will add to that my experience has been in the typical loan size of less than $ 1M, the"Gold Pot" bank puts a lot of weight on your personal credit score, not your business credit score, which ties back to the original post.  The tax returns, canceled checks, etc that I mentioned are merely some of the due diligence process they may go through before actually closing the loan.

Bill mentions several potential pitfalls to sending the check directly to the seller holding the mortgage.  These are all good points.  I tend to be trusting of people people. In doing so, I have exposed myself to this risk.  I will definitely consider this as I set up future owner financed deals!

I buy and sell with owner financing quite a bit. When selling, I don't always use account servicing. But when buying I do always require it. Why? Imagine five years from now, if you want to pay off the loan, and the seller says you owe $10,000 more than you actually owe. If no one has been responsible for the accounting, then you're going to have to battle it out. Account servicers will take care of that issue. 

The main one I use is called Weststar. (I believe they're at Westloan.com). They are the cheapest one I found and they do as good a job as anyone else. I'm not sure what states they operate in, besides Arizona.

Bill Gulley is right. Your personal credit will carry the weight. However, owner financing can be a great way to get into the game if you have some cash to work with. Make sure it is a 30-year am with modest interest rate adjustment caps, and no prepayment penalty. That way you can refinance it but it is your decision, not theirs. Then buy and hold!

JV