This home was sold for $156,000 with a $4,680 down payment in May of 1994. Payments have been made since then and the current amount owed is $144,010. In lender talk, this is a well seasoned note. The buyers have been paying for 15 years so this note seems like it should be easy to sell and to sell with a smaller discount than a “green” or unseasoned note.
An offer was made to the seller (Person being paid on the original note) and accepted.
At that point the prospective note buyer ran a credit check on the buyers and discovered their credit was terrible. Their FICO score was in the low 500’s and none of the investors who buy notes will touch a deal with such a low credit score.
I suspect this kind of situation will be more common in the months/years ahead because the economic downturn is changing previously good credit risks into bad risks. Lets face it, if you loose your job and can’t find another one, your ability to make the mortgage payment goes away no matter what your intentions.
I would guess the note seller in this case didn’t know the buyer’s financial condition. He had been getting his payments for fifteen years so why should there be a problem now. Unfortunately, the same economic problems that are effecting the buyers are probably what motivated the note holder to try and sell the note.
Assuming the note holder needs the money, what can he do now?
- Sell part of the note. If the note holder doesn’t need all of his money an investor might be willing to buy a “partial”. For example, an investor might be willing to buy the next five years of payments for $50,000 (made up number). A loan like that should be quite safe in the event of default. If the buyer continues to make their payments the note would revert to the original note holder after the investor had received his five years of payments.
- Borrow against the note. If the note holder has decent credit and/or other assets he may be able to borrow against the note. In the even of default he would have to continue making payments on that loan, but at least he could get some money.
- It might be worthwhile for the note holder to talk to the buyer about other options. Maybe the buyer has friends or family that would pay off the loan early in exchange for a large discount. Maybe a family member would co-sign so the buyers could refinance.
There are always choices, but they require some thought and planning. Keep in mind you need to start making these kinds of plans well in advance. The actual transaction will require title insurance, a closing, and all the other details of a real estate sale. If you wait until you absolutely have to have the money quickly you will pay a big price for your lack of planning.
