What this due-diligence check covers
Separate the economic terms from the legal structure. A note may be secured by a deed of trust or mortgage, or the seller may retain title under a contract arrangement.
State law and consumer rules can affect documentation and remedies.
Why it matters before closing
Low monthly payments can conceal a large balloon, high total interest, unclear title or severe default consequences.
What to verify
- Calculate payment, total interest and balloon.
- Verify the seller can convey and encumber title.
- Clarify taxes, insurance and recording.
- Use qualified legal and settlement professionals.
Red flags that deserve follow-up
- Unrecorded agreement.
- Seller has an existing loan that prohibits transfer.
- Balloon due before realistic refinance.
- Forfeiture language after small default.
Evidence to keep in the parcel file
- Amortization schedule
- Note and security instrument
- Title commitment
- Proof of recording and payment process
Questions to ask before the deadline
- Who holds legal title?
- Is the agreement recorded?
- What is the balloon amount and date?
- What happens after default?
- Can I prepay without penalty?