Interest Rates & Seller Financing

[Chris Seveney]

Recently I have received emails from note investors whose primary focus is on acquiring owner carried paper. A significant amount of the loans that made there way to me were underwritten at 5-6% interest rates (at a time when rates were at 3%) to borrowers with subpar credit scores. I do not do a lot of origination of loans but when I buy this paper one of the things we look at is the coupon rate, period of time and down payment.

For those looking to create paper and get best offers for it, what are your requirements?

We prefer the 10/10/10 rule.... 10% down (min.), 10 year term (will buy at 15-20 but almost never at 30 because it drastically lowers payments) and 9.9% interest rate (where allowed by law).

Hindsight is 20/20, but if you have the option to buy paper at 5% rate to a borrower with a 560 credit score or underwrite it today at 5% with a borrower with 800 credit score, which do you prefer?

[Marco Bario]

@Chris Seveney -

Numbers paint the bold lines of a picture, and time fills in the colors. 

Examples:

A) Borrower has a 560 credit score, but there is a solid 5-year pay history, and loan to value is 70%.

B) Same Borrower, same 560 credit score. But just 3 payments have been made and the loan to value is 89.99%

Borrower A has shown they may struggle with credit, but they prioritize and value keeping a roof over their head. If I have other questions, I may look to the condition of the collateral (is there pride of ownership?), the property location, and property type.  

Buying loans at a discount will result in a yield over the face rate. At the end of the day, it doesn't matter what the originator agreed to.