Keeping an accurate record of the payments received on a note can actually increase its value. Payment histories show how much the borrower still owes on the loan along with their payment habits over time. It may not seem so important to keep detailed payment records until you get ready to sell your note. Note investors place significant value on the ability to confidently verify the borrower’s payment history. A solid pay history reduces the investor’s risk which results in a higher offer price!

There are two common methods used by note holders to keep track of the payments.

The first, simplest, and best option is to leave it to the professionals – a third-party loan servicing agent (or “servicer”). When the loan is created or purchased, it should be immediately “boarded” with a loan servicer. The borrower makes payments directly to the servicer who keeps track of the loan balance and forwards the principal and interest portion of the payment on to the note holder. The servicer will also handle borrower communications, manage property tax and insurance payments, and send year-end IRS 1098 Mortgage Interest Statements. Third-party servicers ensure that the loan is kept compliant with ever-changing debt collection and consumer protection legislation. Many servicers will even hold the original loan documents for safe keeping, if requested. Third-party servicers charge a reasonable monthly fee per loan for their services.

The second option is the do-it-yourself approach. Back in the Wild West days of seller-financed note investing, before the introduction of debt-collection and consumer protection laws, the “self-servicing” method was quite common. Today, note investors are often tempted to self-service their loans in order to save the monthly servicing fee charged by professional servicers. Here are a few of the steps that must be followed to properly self-service a mortgage note:

1. Store the original note and other original documents in a safe deposit box or home safe.
2. Make a photocopy of each paper check or money order received from the borrower. Important: Accepting cash is not recommended. It is impossible to accurately verify payment history when borrowers have paid in cash.
3. Keep a photocopy or electronic copy of the bank’s record of deposit for every payment received from the borrower.
4. Create and maintain a ledger or spreadsheet reflecting the date and amount of all payments received. Include an explanation for any over-payment or underpayment that may have occurred.
5. Calculate the amount of each payment applied to interest, principal, and late fees (if any). Record in the ledger a running tally of the resulting principal balance due on the loan after each payment has been made. An amortization schedule or financial calculator will be required for accurate accounting.
6. Send an annual statement to the borrower in January which provides a current snapshot of the loan. Include the IRS Form 1098 Mortgage Interest Statement, or equivalent.
7. Periodically verify that the real estate property taxes and hazard insurance premiums are being paid as required. Consider establishing a tax and insurance escrow account and require the borrower to pay one-twelfth of the annual amount into this account each month. This will ensure that adequate funds are available to pay the county and insurance company when these bills come due.
8. Contact the borrower and send collection letters as necessary to properly maintain the loan (e.g., to address overdue payments). Important: Be sure to know and follow all federal debt collection laws when communicating with borrowers.

Investors looking to purchase a seller-financed note will always request a verifiable payment history. Being able to provide a reliable history of payments will increase the value of your note. Being unable to do so will certainly lower the value of the note and may even kill the deal. A payment history is considered verified when it is either provided by a third-party servicer or is corroborated by the documents and records described above.

Unfortunately, many note holders fail to keep track of the payments received from their borrowers. Perhaps they think it’s too much trouble and they don’t ever plan to sell the note anyway. Then, when circumstances change, they are panicked and try and recreate the payment history from memory. There may have been a time when a note seller’s word was enough to satisfy the investor concerning the payment history, but unfortunately those days are long gone.

Protect the value of the note by setting up a verifiable payment tracking method today! It’s never too late to start.

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