Property buyers often want their timely owner-financed mortgage note payments reported to the three big credit bureaus, Equifax, Experian, and TransUnion. A mortgage payment is the best, highest-quality loan to have on your credit report, and timely payments push your credit score higher. However, most private note-holders don't have the ability to report to the three bureaus. Nevertheless, it's in the best interest of both the buyer and the seller to have the payment history recorded.
Pros and Cons
Since most owner-financed real estate deals call for the buyer to refinance into a traditional loan after a 5- or 10-year period, timely mortgage payments increase the chances of a successful transition. Lenders will want to see at least 12 months of regular payments before they'll consider refinancing a seller-backed mortgage, and the biggest pro of reporting a good payment history is the buyer's new, competitive interest rate. However, the opposite is also true; if the buyer is consistently late or has missed payments, his credit score will drop and the chances of refinancing along with it: a huge negative for both parties.
Having Payments Recorded
Reporting loan payments is expensive, and only licensed lenders are permitted to report loan payments to the three credit bureaus; however, if the deal is administered by a servicing company, the chances that the payments will be recorded improve greatly. If a buyer desires to have this occur, she should request this service when the sale agreement is drafted, making sure to elucidate why it's beneficial for both parties. She should also write the bureaus and ask to make a note of the private mortgage on the report. Checking each report periodically to verify her timely payments is key, as well.
Why It's Important
Most owners of seller-financed notes don't intend to hold onto the investment forever; deals are usually structured as 30-year notes with a balloon payment due after a 5 or 10 year period of seller financing. For buyers, being able to show several years of on-time note payments is a critical step in the pursuit of a high credit score. Traditional mortgage lenders will review your credit history and score carefully; if you've had a foreclosure or short sale in the past, a recent history of on-time mortgage payments is essential for establishing the new lender's trust.
The Backup Plan
Because of the expense and difficulty of reporting private mortgage notes, many buyers don't reap this benefit. However, there are steps you can take to improve your credit history and score without your mortgage loan payments appearing. First, make sure you always send a check for your payments; you will use these as proof of timely payment. Second, make a note on each bureau's report that you're making on-time payments on a private home loan. Third, pay your credit card bills on time and in full; don't use more than half your available credit. (Get a secured card if you don't have one.) Finally, an auto loan payment is a great secured-asset installment loan, and a good payment history will keep your scores high.
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