Updated
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 |
_____ |
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 |
|
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
|
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 |
|
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 |
|
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 |
|
|
% 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 |
|
|
% 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 |
|
|
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.