Owner Financing Contract

10 Replies

Does anyone have blank template or form that I could look at to draft a contract for a potential buyer? Thanks.

A purchase contract?

If so...yes...PM me and I will send you a copy of ours. Note that you need to get an attorney to review it for the laws of your state!

Most all standard real estate contracts, like those used by local Realtors, will have a block to be checked for financing by the seller.

Are you asking for a promissory note for the closing or an installment contrcat that has financing terms included in it?

If it is that later, be very careful trying to use someone's contract.

One thing, is that many who provide services, such as underwriting, note buyers, servicing, or any others RE service may provide you with a contract simply to open the door for them to profit.

Two, seller financing is now regulated unless the seller is selling thier primary residence. The terms of any installment contract will need to be underwritten if it is not an excluded transaction.

Three, before you get into a contract, you need to underwrite or assess the ability of the buyer to perform and more often than not, terms, conditions and covenants will need to address issues concerning any deficiency the buyer may have. After all, if they were a good buyer, the should be able to get better terms for financing than most sellers are willing to provide. Taking an existing contract to use can be like putting a square peg in a round hole and if you don't "underwrite" the borrower and provide resonable safeguards you could have problems down the road.

Lastly, you need to address the issues arising from your investigation of the buyer so that you actually use the right kind of contract for the circumstances. You might find that an installment contract would be best, like a contract for deed or a Lease/Option instead of a note and deed of trust or mortgage. If you don't select the right contract to use, say to reduce costs in the event of foreclosure under the laws of your state, you could get hung up in court trying to get possession of the property, or, it could be too that the borrower will not qualify for the future loan required because the paymenst were not structured properly allowing the required down payment to be established, both of these issue can come back on you.

Matt, if you have questions you can contact me and I'll direct you to some information that will probably help (or answer your question). Now, I say that because it is impossible to address all the issues in any forum to get you started. Other questions, bring them up here so we can all benefit from responses. Good luck, Bill

What Bill said...and I'll just throw in.

Research the SAFE law in your state. You may need to hire a licensed Loan Originator to do the loan paperwork.

Get an attorney, and/or speak to the title company you plan to use to close. They will often draw up basic notes and mortgages for free.

For purchase and sale contract, you can use one that is approved by your state.

For a promissory note, you should consult with your real estate closing attorney to make it that the proper terms are stated. Or if you are planning on selling the note at closing to receive cash, check with your note buyer to see if that is the note that they will buy.

Good Luck.

I'll second Celine's comment on checking with one's note buyer before structuring the note. Doing that will help to ensure that one can get the most for that note.

That's a good idea to check with your buyer if you are selling the note, but you can't really devise the note for the optimal price. The best price would be with a balloon payment required very soon, the quicker the better. Any discount will yield a higher return the quicker the payoff is received, you can't really eet the financial aspects for the best financial terms as a priority.

You note needs to be underwritten first as to the ability of the borrower to repay and meet the obligation. Documenting the process will sweeten the value of your note. Get a credit report, verify employment, assets, income and liabilities. You can get written authorizations from most any broker. Then you have a loan file to work off of. Using a standard Fannie-Mae 1003, loan application and filling it out will be the main documentation to work from, again, get the form from almost any broker...banks hand them out for you to fill in if you will be applying for a loan.

Documenting your loan file is the bet thing you can do to add value. Be sure you verify these items directly with the concerned parties and do not allow the borrower to fill in anything other than their inforamtion, verifications must be signed by the reporting party and get the phone number.

Then, after your borrower has been qualified and the file documented, write the terms that fit the situation. If a three year balloon is sufficient that will give you a better price than a five year balloon...but, if the borrower needs five years to reasonably meet the obligation, you better make it five years!

A note broker will only be looking at the discount and basic terms to sell. A broker will not be involved in the foreclosure down the road and could care less, so, to ensure you don't end up repurchasing the note back under any recourse issues, better underwrite the note as your primary objectiive, then go to terms that are acceptable that will yield the best return.....good luck!


Do you really HAVE to do all of that? If I know that Joe Blow down the street has 8 grand and a job, can make his payments because they are the same as his rent and he paid that on time. Am I good to go here?

Or do you now have to go through all of these steps due to federal laws and regulations?

Jimmy, not really, especially if you need to sell your note. If you are going to do a deal like that, Joe needs to be your brother-in-law and hope there is no divorce!

I have seen where Joe lost his job within a couple of months of doing a no documented seller financed note. He got behind with having put 20% down. Long story short, the seller had to give him his money back less fair market rent. Had the seller accomplished some due diligence, sent a verification to, or even asked, the employer it would have been found that Joe's employment might be terminated. The question to be asked is: "What is the likelyhood of continued employment?" and it is to be written in as a narrative response by the employer. Where the employer could have said, "Future employment is unknown as XYZ is being purchased by ABC on March 1 this year"

You can argue Joe should have known, but he was never told and had no idea, not until after he did his contract were the employees told.

Okay, this is a long shot, but it happened, I tried to get Joe another loan, too late! Foreclosure had begun and Joe went to court.

Another issue is selling the note, it will be more valuable if it is processed.

When you borrower fails to meet the obligations, if you did not process the loan and qualify the buyer, you'll likely be seen as a preditory lender, how will you prove that what you took the buyer into was a doable deal? The fact that you knew Joe, is not enough, it could be as easily said that you knew he wasn't qualified to do the deal, took his down payment and set him up to foreclose on the property! At least, that will be the claim, so how do you cover yourself, prove you did a reasonable deal? You can't unless you process the laon and find out, in writing!

Now, what I outlined above is pretty much a full documented transaction. You can take some short cuts in processing when there are compensating factors.

Let's say your buyer is in the Army, an E-7 with 12 years in service. It's unlikely he will lose his job and it's unlikely his income will go down. Getting a mortgage credit report will show his liablilites and credit history. Asking for his latest LES (Leave and Earnings Statement) will give you his pay and year to date earnings. For a seller financed note, you have two things, an LES and a credit report, which is sufficient for this borrower. Initially;

Now let's say the sale is with 20% down and the Buyer has a credit score of 540, and on the LES you see that child support is being taken out as well as a judgment and an auto draft for a car payment. You do his ratios and find that he has 32% for your note payment but his top ratio is 65%! That's a no-go!

Now he tell you he has been working in his off duty time on post at the NCO Club for 1 year and makes enough to bring his top ratio down to 35%, is that a good loan?

The key to underwriting a seller financed deal as opposed to a secondary market or bank loan is looking into the future and anticipating the various problems that might arise, within reason, what should be expected.

Unlike banks, that can look to the future in some gray areas, if the borrower qualifies that day, he qualifies! But, if a borrower defaults to a bank, that lender will be viewed as an institutional lender, being regulated. (A book could be written about this aspect, but I'll make it brief I promise) An individual lender will have more scrutiny in any civil case, individuals will need to show that what they did was fair and reasonable, it's assumed that banks conduct business within legal requirements.

Processing a loan is CYA for the lender and indicates a degree of fairness and safty for the borrower. This is not so much of an issue in commercial transactions, where the borrower is considered to be a business person, but residential deals need to be accomplished with more care.

What happens in seller financed deals...people lose their job, they move for a new job, the die, they get divorced, they take bankruptcy, they have other family members move in with them that strains them financially, the get sued, they become incapacitated and so on.... In conventional financing, these underwriting issues are statistically managed and considered by the ratio analysis in line with the down payment, not only does it indicate the loan risk, on the flip side it shows the ability of the borrower to pay as agreed and succeed.

So to our E-7, what happens to military people evry three years, generally? They ship out! This guy has 12 years, he has 8 more to go to retire. So to be prudent, you know he will be losing that part time job soon, before any balloon payment might become due. That means when he is in an overseas station and his family is sitting in his home (we will assume) his ratios just shot up and he may not have sufficient time to cure his credit problems.

I live in a very conservative and pro-business environment and when courts begin looking at the degree of fairness and underwriting reasonableness that individuals get into, it's time to do things in a more professional manner. Years ago, one farmer would buy the neighbor's back 40 on a handshake and a check, with payments for 5 years, now, if there is a hosue on that 40 acres, there is the FAST Act.

Seller financing got to a point where too many people were being scammed or just getting involved in something that they were sold, so now we have the SAFE Act. There are other reasons as well to limit this type of financing too, but the government and courts will be pushing it as a consumer oriented issue. That means the individual lenders will be on the defensive, showing they were dealing in good faith.

So, what would I do with our E-7? It would be a judgment call, if he could get the credit repaired prior to any balloon payment. I might look at stretching the balloon payment out to six years, two years left on his enlistment so that he could still qualify for a conventional loan. I might actually take less as a down payment and another amount in a joint escrow, so that it could be used later to refinance my loan. I might also just put him in a lease-option long enough so that after his part time job was lost, he could obtain another part time job (if he had a record of working part time jobs).

One more example, a teacher. Good employment, steady income, with some credit blips keeping them out of conventional financing. The processing can be limited to a verification of employment, credit report and current pay-stub showing year to date earnings. The credit blips need to be addressed. A simple acknowledgment signed by your borrower concerning the creidt issues and addressing what needs to be done to correct the issue will be sufficient. That's it. If ratios are good, I suggest no more than 38/50, but you still need to look at compensating factors. So, a pay stub, credit report and a letter of acknowledgment. Not a big deal.

If you are selling your note, or think you might in the future, get all the documentation you can for your loan file. Not only does it show additional information and make representations about the loan, it also shows a degree of professionalism in the note process, idicating a quality loan.

Hope all this make sense to ya.....good luck!

Regardless--you are taking a chance-- a good renter can afford- but when he looses a job or have a baby or a car accident and needs a new car --he will not have money to pay mortgage-
We all take some risk in life--so you have to decide and feel comfortable OR lower price and sell house at discount to cash investors.

However, if you decide --go to your local court house- recorder's office--check what notes are recorded --make a copy and understand -
at least have a a draft readyf for attorney.

Other safety--make a 60% or 70% first mortgage --30 or 40 year term with five year baloon --but also take a second mortgage --to keep control of proeprty --with a cross default clause--

Good Luck.

Thanks financeexaminer,

As a former MB, I wouldn't have a problem getting a full 1003, VOE, VOD, VOR, etc....

So I should process it like I would have a full doc FNMA loan back when I did loans? And then of course get my title company/attorney to handle the disclosures and closing. If I do all of that, I should be good right?

I mean, if I know how to process and package a FNMA loan, then I dont need to involve 3rd party to process it for me right?

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