How to Qualify Your Seller Financed BuyersHow to Qualify Your Seller Financed Buyers

How to Qualify Your Seller Financed Buyers
One of the most neglected components of seller financing is evaluating a potential buyer. Many of the notes we see have had little if any proper due diligence on the ability of their buyer to make the payments.
Overly eager sellers are entering into poorly written contracts with risky buyers. I am going to help you fix that issue today. This is not exhaustive by any means, but will hopefully get you thinking in the right direction. Remember, you are extending someone credit, you owe it to yourself to leave nothing to chance. Go into this with your eyes open.
From the time you first meet or speak with your potential borrowers, make sure you take good notes. They will share their timetable for buying, the amount of their down payment, where they work, where their kids want to go to school, and a host of other personal information about themselves just as they are passing the time talking with you.
You can learn more by visiting us on the web at www.thenotecoach.com or by contacting us. We provide ‘Note Manufacturing Services’ which does everything included in this article and much more.
Evaluate your borrower and your transaction using the following elements. These are gathered from a loan application and a borrower’s credit report. These elements provide general guidelines for your due diligence and loan underwriting. Remember, as the owner financier, you’re “the bank!” and as such you should have criteria for lending:
Character. To me, character is the most important component of underwriting. Remember that no matter how good the credit report or how strong the income and assets of the applicant, if he or she is dishonest, deceptive or disregards obligations, you do not want to do business with them. Conversely, a person with strong character and a sense of responsibility can overcome many adverse circumstances that might otherwise cause problems down the road. You’ll want to make every effort to get a feel for the character of the person applying for owner-financing.

Credit. What is the borrower’s track record for handling their money? Typically a borrower’s past spending habits are a good indicator of the borrower’s future spending habits. On the other hand, sometimes bad things happen to good people.

Capital. Does the applicant have any savings or net worth to get through a rainy day? Do they have the funds necessary to make a down payment?

Capacity. Does your borrower have the ability to repay the loan from normally recurring sources of cash, i.e., sufficient income from stable employment?

Collateral. In the realm of seller financing, the property being sold typically is the collateral. For someone providing seller financing, it is important to know the value of the property in relation to how much is being financed. This is especially true if the seller is interested in structuring a marketable note.
The Loan Application
One of the most important tools that you will have available to evaluate (interview) your potential borrower is the loan application
Remember, in this transaction you are the bank and due diligence in your “underwriting process” begins with this loan application process. Do NOT shortcut this process – verify all the data listed and missing on the application.
You’ll want to use a form that asks all the important questions, of course, but more importantly, you’ll need to verify each and every item on the application. Many lenders use the Freddie Mac Universal Loan Application which is very detailed and asks all the important questions.
Social Security Number. Perhaps the most important piece of information on the application is the borrower’s social security number. Always ask to see the original Social Security card to verify that the number is correct.

2 Years of Lease / Rental History. Call the former landlord if they were not previous homeowners.

2 Years of Employment History. Review employment gaps for all borrowers on the loan. Verification of employment includes calling each employer for a reference, checking the length of employment, as well as the current salary.

Assets and Liabilities. Verify amounts in bank accounts and liabilities to complete a debt-to-equity ratio review of their financial situation.

Credit Report Review. This report is vital to avoiding risk and evaluating your buyers. Remember to verify the social security number of the borrower with the loan application they completed. You need written permission to pull someone’s credit if they are looking to purchase your property using seller financing.

Reference Verification. Call all references. Gather as much information as you possibly can.

Establishing Your Criteria to Lend
Now that you are considering seller financing and in essence, being the bank, you should establish the criteria you will use to lend. If you ever decide to cash out and sell your payments to a note buyer (like The Note Coach) we use these questions in helping to determine the value of a note. Using these questions as a guide will help you determine how you should structure your note.
1. Is the borrower’s credit score less than 580?

2. Are all the borrower’s credit report trade lines less than 6 months old?

3. Has the borrower had a bankruptcy in the past 3 years or more than 2 in their lifetime?

4. Has the borrower had a foreclosure in the past 5 years?

5. Are there numerous mortgages listed on their credit report or does the borrower have an existing mortgage that’s not reflected on the credit report?

6. Has the borrower been with the same employer for less than 1 year or in the same line of business for less than 3 years?

7. Will this be the borrower’s primary residence?

8. Is the household income less than $2,000 a month?

9. Is the debt to income ratio greater than 50%?

10. Can the borrower afford to this additional monthly expense?

As you can see, there is a lot more to qualifying your buyer than asking them a few questions and maybe looking at their credit report. Remember, every ounce of work done upfront, before the transaction is complete, will pay off in the end.
Take the extra time required to do the proper homework before the sale of your property.
(The Note Coach offers ‘Note Manufacturing Services’ to handle all aspects of the seller financing process. But if you wish to do these tasks yourself download our free checklists and resources so you can get the most out of your seller financing transaction.)