The next items on the documentation checklist cover the underlying senior debt, if there is any, and the payor’s confirmation of what they owe. Together they complete the documents you need to make a purchase decision and schedule settlement.
Review the senior debt documents
Get a copy of the note and security instrument for any senior debt. Confirm that the amounts, terms, conditions and outstanding balance are what you’ve been told. (Some notes allow extra debt to be added after the loan has been paid down for a while.) Read them for most of the same things you looked for in the documents on the note you’re buying.
Pay special attention to whether there is a due-on-sale clause, the terms under which the loan can be called, and what happens to you if it is called. What are your remedies and options to protect your position? Also check for any terms that might affect you even if all the debts are performing.
Think about subordination clauses, too. What else could be lurking to cause a problem? Don’t be afraid of potential problems; just be aware of them and know what they mean. They could become opportunities. All you really have to do is read and understand everything.
These documents also tell you the lender’s name, the loan number, where the debt is recorded and whom to contact. There will be several times, for several reasons, when you may want to contact that lender.
Verify the senior loan is current
Next comes the senior debt status verification letter. Contact the senior lender to confirm that payments are and have been current and that the outstanding balance is as reported to you. People have been known to pay the “small second” mortgage while in default on the first. You would not want to buy a second with the first in default.
Confirming the current balance matters because it affects your loan-to-value ratio and exposure, and differences can lead to disagreements later. Maybe extra debt has been negotiated with the lender, or back payments or interest have been added to the balance. The answer also tells you something about the payor’s current financial condition. Either way, you need to know.
Lock in the facts with a payor estoppel affidavit
Next on the list is the payor estoppel affidavit. Its purpose is to have the payor acknowledge that they owe what you’ve been told they owe, and to estop any future disagreement on those points.
In effect, the payor is told: if you don’t agree with the facts as stated, tell me now. Don’t come back later and say things were different when the note was bought.
Credit approval and income property statements
Credit approval means you have received and evaluated the credit report. If a credit application has been submitted, as when you buy right after settlement, verify everything on it. But remember that your ultimate recourse is the property. Credit information helps when you resell notes, because other investors may put more weight on the payor than you do, and the credit history will certainly affect your resale price.
A profit and loss (P&L) statement applies mainly to investor-owned or commercial properties, which are expected to produce the revenue to make their own payments. If you had to take the property back, you would want to know it could pay its own way, and that you would know how to operate it to make it pay. Since this doesn’t apply to most notes you would personally hold, I won’t go further here.
That covers the first 16 items on the documentation checklist and completes the documents you need to make your purchase decision and schedule settlement.
