Credit plays a big role when it comes to notes. You still have to have good credit, and we look at this in length. What’s driving this person’s credit down? Is it the fact they went through a tough season and they haven’t taken time to re-establish credit? Are the issues on their credit old issues? Are they recent issues? Are they medical issues? Are they credit card issues? Are they child support issues? What’s actually doing the damage that is bringing the credit score down? Is it something that they can easily rectify? If they had an extra $1,500, could they pay off these three or four accounts which would in turn raise their credit score? The point being is that most of these things are very solvable challenges with a home buyer.
The question then becomes if they are willing to do the deal. Is the note seller willing to help them or are we just buying it as is? Because ultimately notes are sold as is. There are no reps, there are no warrants. When we purchase it, we purchase it in its entirety. We can do partials, but even partials are purchased in their entirety. With that being said, now we’ve got full responsibility over that particular investment and with that we now have to understand we are actually investing in, meaning that homeowner, that particular property, and his or her ability to repay us in a timely fashion.
It has never been our goal in business to take somebody’s property. That is not a model to us at any level. That is a costly, expensive, time consuming legal hassle that is part of the industry, but it shouldn’t be the main part of the industry. That is always something that we strive to address in the early stages of reviewing a note deal. Now no matter which category of a seller we are working with, whether it’s somebody that wants par or somebody who thinks they’ll only get 20 cents on the dollar, or somebody that’s very reasonable and has done a couple of deals, one of the things we always want to see on the front side is the borrower’s credit.
The easiest indicator to determining the value of the note is a borrower’s credit, not to mention you can get a copy of their credit relatively easy and relatively inexpensive. That is a key element just like everything else that we deal with as consumers. One of the first things any creditor wants to know about you and me or anybody else is what our credit is so that they know if or how to work with us within our request, whether that’s buying a cellphone, getting health insurance, buying a house, a car, etc.
So, when we are first talking with a seller, we want to get the basic numbers of the deal. We want to get a copy of the borrower’s credit and then we have a little in-house mortgage worksheet that we use, and we fill it out or the seller can fill it out. We actually prefer that the seller fills it out, so it is more accurate and we don’t overlook something and make an honest mistake. But with that, we can in turn determine whether or not this is a deal that we can work with and help that seller accomplish that goal.
Now why do we do it that way? Well, it’s simple. We do it that way because we want to put the best pricing possible and the most honest and accurate pricing possible upfront and on the table. What happens a lot of times is people will overprice the deal only to find out two weeks later that the borrower’s credit is not a 640, it’s a 550. Now they have to change the offer and ultimately that doesn’t sit well with sellers. It doesn’t sit well with anybody involved in the deal and I see most of the time those deals fall apart and they never get done because now the trust between the parties has been breached and broken and now nobody wants to work with each other. Or if they do work with each other, they work with each other to get the deal done and then they never do business again.
Now, there’s a lot of flaws in that. I’m not saying one party is better than the other when you’re dealing with a buyer and seller doing it that way. I have just learned after 21 years that if you can get some really high-quality information upfront, more accurate information, that ultimately, you’re going to have a more accurate quote and have a much smoother deal from beginning to end.
The other side of that equation is we want to make sure, especially on newly created deals, that the home buyer has the ability to repay. We want to look at their debt to income ratio. We want to make sure that they are not making $3,000 a month and their mortgage payment is $1,500 a month. That’s not a debt ratio that we can live with. What we’re typically looking to do, and although we can actually go above this, we like to keep the debt to income ratio right around 36 to 38%. We have found that that’s a very comfortable ratio for the homeowner. It’s also a very comfortable ratio for us and it helps us to avoid any future defects in the note and any future foreclosure possibilities associated with that note.
Now, once the deal is done, meaning that it is a seasoned deal, say one or two payments, we can’t change the terms of the deal but we can still look at their debt to income ratio on the deal to determine whether or not that’s a deal that we would want to purchase. We usually do that through looking at a 1003. We encourage all sellers to get a 1003, fill it out and then have that on file internally and use it for their own debt to income ratio as well.
A 1003 is a standard industry credit application. Most people have seen them if they have gone and applied for a mortgage loan at a bank or a mortgage broker and you can easily get one by going online. In that 1003, you will see everything from the address of the property, the type of property, the borrower’s information, the co-borrower’s information meaning name, address, social security number, job information. It also gets into their liabilities, into their assets, what their current rent or mortgage is, what their proposed mortgage is going to be. It gets into several questions about foreclosures and bankruptcies. So, it’s an all-inclusive credit application that once the note holder has that, they have very extensive information on that borrower which helps them to put together a higher quality file.
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