Gimme a Little Credit

How important is credit score when creating a note? Well, it depends. Some investors go strictly by credit scores and other investors are more interested in payment history and other factors behind why their credit score is so low. Here’s an example of two notes, both with 12 months worth of payment history, same interest rate, and the value of the note is $80,000:

1. The first buyer has a credit score of 620.
2. The second buyer has a credit score of 580.

Which is better?

Well, let’s provide you with a little more information. The first buyer (credit score of 620) put down $6,000 as a down payment. They are a husband and wife with 2 kids and the husband is the only member of the household working. They have been 15 days late twice in the first year.

The second buyer put down $12,000 as a down payment. They are a husband and wife with 2 kids, but both parents work. They have never been late.

Now which note has more gold?

Creating a note where the buyer has a credit score of 600+ may seem like the safest way to sell a note. Logic would dictate that the higher the credit score, the more likely the person is to pay his or her bills on time and be able to refinance their loan through a bank. But a credit score is just a snap shot of historical performance and not a good predictor of the future. If the buyer was recently laid off and started a new job that pays him 25% less than what he was making before, then there’s a good chance that some of his bills won’t be getting paid on time. The credit score is not the only thing to look at when determining whether or not to create a Seller Financed Note. You will want to find out what the story is behind their payer. Here are some other items to consider:

1. Do we have a two income household (husband and wife)?
2. What does each payor do outside the home for a living?
3. Who are they employed by and how long ?
4. Where are they in the cycle of life?  20s, 30s, 40s, 50s,…..70s?
5. Are the Taxes & ins current?
6. Car payments current

In addition to a credit score, the ‘story’ of the buyer can be more of a determining factor on the acceptance or rejection of a note than just the credit score itself. Here’s an example:

A note holder came to The Texas Note Company wanting to sell his note. The original note amount was $105,500.00 with a 10% interest rate amortized over 240 payments. When the note holder came to us looking to sell the note it was well seasoned with 28 on time payments. Once we obtained a buyer, we began our due diligence.

The first thing we did was look into the ability of the payor to make the future payments. What we found was the payor had been paying by check and had been making his payments twice a month on the 1 & 15th, without a hitch, all 56 payments in this case had been made on time. This was good.

Then we ran his credit and learned that he had a foreclosure on his record. This was bad and presented several problems, one of which meant all institutional buyers were out of the picture because regardless of the reason, they could not purchase a note where the payor had a foreclosure on their record due to rules and regulations.

While it looked like we were down for the count, we were able to fight back because had a good story behind the foreclosure. What we found was Hurricane Ike, the second-costliest hurricane ever to make landfall in the United States, had destroyed our payor’s previous home and left him with nothing but a cement foundation. The payor had hazard insurance and hurricane insurance on his home when the storm hit September 1 2008. The problem was the insurance company would not honor his claim, determining that the home was destroyed by a tornado generated out of Hurricane Ike, but not by Hurricane Ike itself. The payor, therefore, was not covered for tornados. He went to court and lost then suffered a foreclosure on the property.

After all this mess, our payor, who is a pastor in a church, needed a place to live. A member of his church, our seller, offered him a home with seller finance terms that he accepted. Now after 56 bi monthly payments, our seller wants to sell his note as he had another project he needed the money for.

Obviously this pastor was not a bad man but was the victim of an unfortunate circumstance. Armed with a good story to explain subpar credit, we were able to locate a buyer that was willing to overlook the foreclosure and purchase the note anyways. When it was all said and done our seller was able to get a good price for his note and our investor got a good investment.

Robert E Young is the Founding Director of The Texas Note Company. He is a Real Estate Investor who puts real estate transactions together using proven seller financing strategies and techniques.  He purchases and brokers private real estate notes often enabling home sellers the ability to move on to the next transaction with the cash needed. Robert enjoys teaching and educating real estate minded people the advantages of Owner Financing and what it can bring to a real estate transaction while dispelling it’s myths.  When traditional financing methods fail to provide the benefits buyers and sellers are looking for, often it is seller financing to provide a solution.