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Can a Homeowner Refinance a Privately Held Note?

by Tim Plaehn

Financing a home purchase through owner financing or another private loan source allows a buyer to get into a home when conventional bank financing is not an option. It may be possible later to refinance to replace the private note with a mortgage from a commercial lender. The feasibility of this option depends on your personal financial situation.

Recorded Lein

The holder of the private note on your home should have filed a lien on the property at the local court. A lien, even from a private individual, shows that there is an existing loan to be refinanced. If the loan has not been officially recorded, it will appear that you own the home outright. Lenders might find it hard to refinance a loan when no recorded lien exists. The holder of the note should have filed a lien to protect her interests, so one probably exists unless the note was a family arrangement.

Home Value Considerations

To be able to refinance into a regular mortgage, the value of your home must be greater than the balance of the private note. A lender will order an appraisal of your home; if the appraised value is high enough, you can proceed with the refinancing. To refinance to a Federal Housing Authority loan, you need at least 5 percent equity in the home. Other types of mortgage will require higher levels of equity. When you refinance, the private note will be paid off by the lender and then you will make payments on the new mortgage loan.

Credit Qualifications

To obtain a new mortgage you must meet the personal credit requirements of the lender for the type of loan you are seeking. Credit qualifications include earning enough income to meet debt-to-income limits and have a credit score that indicates you have a history of paying your bills. If you cannot qualify for a refinance loan, you will still have the private party financing and need to continue to make payments on the note.

Renegotiate Private Loan

Although the holder of the note has no obligation to change the terms of the loan, you can ask to change the existing rate and payment amounts. You need to be able to give the lender a good reason why she would accept a different arrangement. One example would be that the home value has declined to less than the loan balance. The holder of the note may accept a lower interest rate to avoid having to foreclose on the home because you cannot continue to make the payments.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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