Even if you’re planning to hold onto a loan you’ve just originated, it’s smart to think ahead: What will this loan be worth if I decide to sell it later?
These loans aren’t just pieces of paper—they’re assets often worth hundreds of thousands of dollars, tied to 20- or 30-year terms. At some point, you might want to convert that paper into cash. And if you’re working on a subject-to deal, you may need to quickly offload the loan if the underlying lender enforces the due-on-sale clause.
The way you structure your loan terms will directly impact how much your loan is worth—and how easily you’ll find a buyer when the time comes.
Over the past few months running Call The Underwriter, I’ve gained valuable insight into what investors are really looking for when purchasing newly originated seller-financed loans. Here are a few key takeaways to help you maximize your loan’s value:
1. Down Payment: Bigger Is Always Better
The size of the borrower’s down payment plays a major role in the loan’s appeal.
Most loans we’re originating have around a 10% down payment. For these, buyers typically expect to discount the purchase price enough to give themselves a 12-15% return (usually closer to 15%).
If you want to sell your loan at par—without taking a discount—you’ll need to aim for at least a 20% down payment.
Many buyers won’t even consider a loan unless it has an LTV of 80% (and some require 70%!).
2. Interest Rate: High Enough to Attract, Low Enough to Stay Legal
Interest rates on the majority of seller finance single-family residence (SFR) loans I see are in the 9-10% range. In Texas, they tend to run higher. Mobile home loans often fall in the 14-17% range.
While a higher interest rate can make your loan more attractive, but be mindful of usury laws to stay compliant.
3. Loan Term: Shorter Is More Valuable
This is often overlooked, but shorter loan terms can boost a loan’s value.
Why? if a buyer needs to discount the loan to hit their desired return, a shorter term reduces the size of that discount. Plus, a shorter term means faster principal paydown for the borrower, which is regulators consider borrower-friendly.
Caution: Shorter terms increase monthly payments. Ensure the borrower’s debt-to-income ratio is still compliant.
Let’s Break It Down with an Example:
Imagine a buyer needs a 13% return for a given loan, and your loan carries a 10% interest rate. You can see from the table below that as we shrink the loan term, the discount we need to give the note buyer decreases.
30-Year Term: To meet that return, you’d need to sell the loan at a 21% discount on the balance due.
10-Year Term: That discount drops to 11%.
Now, if the interest rate was higher or the borrower put down a larger down payment, the discount would shrink even further. Lower risk = higher loan value.
Final Thoughts
The way you structure your loan—down payment, interest rate, term length, and the borrower’s creditworthiness—can have a huge impact on its value. Think through these factors before signing off on your next purchase agreement.
If you’d like a second opinion on your loan terms before finalizing, feel free to shoot me an email or give me a call. I’m always happy to help you maximize the value of your investments.
Cheers,
Dan