A modified note sells on its terms as they stand today, provided the modification is in writing and signed by you and the payer. The price then moves mainly with the reason the note was changed and with how many payments have arrived on time since.
What counts as a modification
Any agreed change to the original terms is a modification: a different interest rate, a longer term with a smaller payment, missed payments added to the balance, a balloon date pushed back, or a spell of reduced or interest-only payments.
An informal arrangement counts too, and causes more trouble. If you told the payer by phone that they could pay less for a while, the note says one thing and the bank statements say another, and a buyer comparing the two will see it.
If the change was never written down
Deal with this before anything else. Have an attorney prepare a modification agreement stating the terms actually being paid, the current balance and the date the change began, for you and the payer to sign. Date it on the day it is signed, because a document made to look older than it is does more harm than having none.
Why the reason matters
A buyer reads a change agreed between parties in good standing, such as a lower rate in return for a principal paydown, as a new set of terms to be priced on its merits. A change made to rescue a payer who had missed payments reads differently, as the mark of someone who has struggled once and may again.
A note that fell behind and is paying again is called a re-performing note. It sells, though buyers want evidence that the recovery is real.
The payment record starts over, in part
Seasoning is the run of on-time payments a note has behind it, and it is the best evidence a buyer has that the payer will go on paying. After a modification the payments that count for most are those made under the new terms, because they show the payer can afford the note as it now reads. Earlier years of history still help, though a late stretch just before the change weighs against them.
A note modified last month is therefore hard to price well, and the same note with a solid run at the new amount is a different proposition. If you are in no hurry, letting that record build may do more for the price than anything else in your control, for the same reason that seasoning changes the price of any note.
How each kind of change moves the price
- Lower rate. The buyer wants a set return on its money, and a lower note rate means a bigger discount to reach it.
- Longer term. Payments further in the future are worth less today, so stretching the note out lowers the price.
- Arrears added to the balance. The amount owed rises against the same property, which thins the equity protecting the buyer.
- A principal paydown. This works the other way, since more of the payer’s money in the property makes the note safer.
Paperwork a buyer expects
- The original note and recorded mortgage or deed of trust
- The signed modification agreement, with the date it took effect
- A payment history that shows the old terms, the change and the new terms
- Proof of recording, where the modification was recorded
Whether a modification should be recorded, and whether it needs anyone else’s consent, depends on what was changed and on state law. If another lien sits behind yours, a change to your note can sometimes affect the order of priority. Ask a title company or attorney to look at this before you sell, since a buyer’s title check will raise the same question later.
The modification agreement joins the other documents you need to sell a note as a permanent part of the file, and a missing or unsigned one lowers the price in the way any gap in the paperwork affects a note’s value.
Count the payments since the change
Lay the payment record beside the modification agreement and count the on-time payments made at the new amount. That number, with the reason for the change, is the first thing a buyer will want to know. When you send the note in for pricing, include both, and if you are able to wait, ask what a few more months of history would do to the offers. If the payer slips again in the meantime, look up late payers in the situations guide before you agree anything new over the phone.
Related questions
How long should I wait after a modification before selling?
There is no fixed rule. Each buyer sets its own minimum, and more on-time payments under the new terms generally means a better price. If you can wait, ask us what a few more months of history would do to the offers.
Does the modification have to be recorded?
It depends on what was changed and on state law. Some changes are commonly recorded, others are not. Ask a title company or attorney, since a buyer's title check will raise the question anyway.
Can I change the note back to its original terms to get a better price?
Only with the payer's written agreement, and only if they can afford the original payment. A payer who misses payments under restored terms leaves you with a weaker note than the modified one.