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Updated 08/09/06

Note Grading and Pricing

An example:

Updated 03/08/06

This is an example of grading a note to help you understand what the investors are looking at when they determine the quality of a note and thus what they are going to pay for the note.  This is just an example for you.  This shows you what is happening to a certain degree behind the big green curtain. J  I want you to understand that it is the investor who is going to be doing this.  You do not have to determine quality of a note.  It is nice to have an understanding of what is being looked at however.

With that in mind let’s look at the six main factors that are looked at and evaluated in order to determine what a note is worth.  Each one of these factors carries a percentage of the total weight.  Total note is equal to 100% and each factor will have a varied percentage depending on the situation.   In fact the weight of each of these factors will vary depending on the other factors.  Below you will see the factors listed.

Note position X% (1st, 2nd)

Collateral X%,

Credit is X%,

Equity is X%

Payment history / Seasoning is X%, 

Interest rate X%,

I have left the percentages out because of the variances in each deal.

 

Let’s look at each factor one at a time.

 

Position of note

Position

Score

1st

5

2nd

2

3rd or lower

0

score

_____

 

 

 

Property/Collateral Category

6

Best

5

Good

4

Fair

3

Slightly risky

2

High risk

Score

O/O SFR’s on fewer than 10 acres; O/O town homes

O/O SFR’s on 10+ acres O/O modulars, DW mobiles on 1-15 acres, or in MH subdivisions NOO townhomes, O/O 2-4 units 2nd homes

O/O condos, modulars, DW mobiles on less than 1 ac. or 15+ acres; NOO SFR’s & NOO 2-4 units

 

Non O/O condos, Modulars, and DW mobiles,

Single Wide mobiles,

Commercial with running business

Vacant land with improvements

Vacant

Commercial property

Vacant land with out improvements

Mobile homes with out land

 

_____

Key:    O/O=Owner Occupied

                      SFR=Single Family Residence

                   DW=Double Wide (mobile)

        MH=Manufactured Home

                      NOO=Non Owner Occupied

                  SW=Single Wide (mobile)

 

Credit:

With the credit factor the investor is going to pull the credit score for the payor and then we would simply take that score and enter it into the graph below as we did with the Equity percentage. 

 

Credit Rating Factor

Primary Repository Score*

Score

Lower

Upper

 

0

500

0

501

550

1

551

600

2

601

625

3

635

650

5

651

679

6

 

680

700+

7

 


 Score:________

 

Equity:

          The first thing you need to learn here is how to figure the Equity as a percentage.  First realize that Equity is the opposite of Loan to Value.  So if we can figure the Loan to Value we will know the Equity.  For example, let’s assume we have a loan of $85,000 and the value of the property is $100,000.  Here is how we would put it into the calculator to figure LTV (Loan to Value): Enter 85,000 then press ÷ then enter 100,000 and press=.  This will show you the answer of .85 or 85% which is your LTV.  What is left? .15 which is our Equity.  So the Equity is 15%.  This can be figured in this simple manner no matter what the numbers are.  Just remember that the “L” or loan should be all loans against the property added together.  Now let’s find our 15% in the graph below.  We are looking at each line reading left to right to find what “score” line we are on.  With 15% we are looking at a score of 3 because we fall between 12.1% and 20.0%.

 

Equity Factor

Equity Range*

Score

Lower

Upper

 

0.0%

5.0%

1

5.1%

10.0%

2

10.1%

15.0%

4

15.1%

20.0%

5

25.0%

50.0%

6

50.0%

99%

7


 Score:________

 

Payment and Seasoning:

          With the payment/Seasoning factor we are looking at the payment history we are looking to see if it is up to date and how many payments have been made.  Most importantly we are looking to see if they are current right now.  If so, how many payments have been made on time?  We also want to see if they are behind at all. 

Note Payment and Seasoning Factor

Late Payment Record

Score

No payments for  24 Mos. or more

-15

No payments for  6Mos. To 24 Mos.

-10

No payments for  3Mos. To 6 Mos.

-5

No payments for  1Mos. To 3 Mos.

-2

Paying but 30 days behind

-1

Paying but always 15+ days late

2

1-3 mos. On time payments

4

3-12 mos. On time payments

5

On time 12 months to 35 months

6

On time 36 months or more

7


 Score:_________

 Don’t think that seasoning makes all the difference.  It is only one factor out of many and the other factors can outweigh this one.

 

% Residential (including mobile home with land) Interest rate

Rate range

Score

 0%-2%

1

2.5%-4%

2

4.5%-6%

3

6.5%-7.75%

4

8%-9.5%

5

10% or more

6


 Score:_____

 

% Commercial and vacant land Interest rate

Rate range

Score

0%-2%

1

3%-5%

2

5.5%-7%

3

7.5%-10%

4

10%-12%

5

12.5% or more

6


 Score:_____

 

% Mobile home (no land) Interest rate

Rate range

Score

0%-2%

1

4%-6%

2

6%-9%

3

9.5%-11%

4

11.5%-13%

5

14% or more

6


 Score:_____

 

 

 

Final Note Rating

Note Score

Grade

0-8

D

9-11

C

12-15

B

16-20

AB

21-24

A

25-29

AA

30-37

AAA

 

 

This should be used as a general guideline only and the actual offer you get these days may vary.  The best way to understand grading is to go through the process with the investors and with actual notes.