The quality of your seller financing documentation is an important aspect of the seller financing process between you and the property buyer. Once you and buyer have agreed to terms, your seller financing documentation needs to comply with the 2014 Dodd-Frank federal legislation. Basically this legislation requires a good-faith effort on your part to confirm that the buyer has the ability to pay back the negotiated promissory note.
Seller Financing Documentation
How do you confirm that the Borrower can pay back the promissory note? Similar to any bank or mortgage company, you would have the Borrower fill out the Uniform Residential Loan Application (often referred to as Fannie May Form 1003). By filling out this form, the Borrower will list ALL their Income, Assets, Liabilities and Legal Judgements. Using the Debt Rule to evaluate the Borrower´s Financial Profile, the back-end ratio of total monthly debts (including the promissory note payment) versus total income should not exceed 40%. If your promissory note terms includes a balloon payment, you should closely review the Borrower´s assets and credit to assure he/she can pay or refinance the balloon payment when due.
You may choose to use a local third-party Licensed Mortgage Originator to ensure that you have complied with the Dodd-Frank legislation. This will help you ensure a high quality mortgage loan with increased value, should you decide to sell it in the future.
At the time of sale you will be transferring the property deed to the buyer and in return you will be receiving the promissory note and the property security document. Depending upon which state you live in, this will be either a Trust Deed or Property Mortgage. The property security document must be recorded at the county registrar during the sale and transfer of the property. Additionally you will provide the Buyer of the property with a lender´s title insurance policy that insures that the property title is complete and that you can legally transfer the property to the buyer once the promissory note is paid off.
The Promissory Note is an important seller financing document and will include:
- Payee – who is making the loan and will receive the payments
- Maker(s) – persons responsible for making the payments
- Interest Rate and Date on which interest begins
- Frequency of Payments
- Amount of each payment and date when first payment is due
- Maturity date (or Balloon Payment Date)
- Grace period – when is payment late and late fee due
- Default Rate – if a default is declared, what Interest Rate will be charged
- Reference to the property security document that secures repayment of the loan
The Property Mortgage (Trust Deed or Real Estate Contract) is the property security document. This document is the “glue” for your promissory note that pledges the property as collateral that can be foreclosed in case of non-payment of the loan. As mentioned the property mortgage is recorded at the public registrar and acts as a lien against the property and later it is ceded to the buyer at the completion of paying off the promissory note and also recorded. It is very important that the Property Mortgage is thorough and complete so we suggest that you should check to make sure that:
- Reference to the Promissory note and date
- Correct and complete identification of the property
- Identification of the Mortgagor (the buyer)
- Identification of the Mortgagee (you, the seller)
- Buyer to make payments prescribed under the promissory note, pay taxes and insurance
- You, the seller, to be the lien holder on the insurance for the property. This assures that you, rather than the buyer, receives any insurance payment if there is a property loss.
- Buyer to make payments that are necessary to protect the property against other liens that can come ahead of the promissory note (e.g. tax assessments, condo fees)
It is recommended that you avoid the temptation of trying to save a few dollars by doing the seller financing documentation on your own. Considering the amount of money that you will be owed on the note, you should consider using a professional title company to protect your interests and the quality and value of your mortgage note.