Sometimes life presents tough, unexpected situations that significantly damage the pocketbook and put people’s homes at risk. Delinquent mortgages often wind up in foreclosure, which in most states means that the property will go up for auction to the highest bidder. For homeowners, the prospect of losing their house is a big incentive for them to start looking elsewhere for money. Sometimes, that solution is in the form of selling their mortgage to another lender or independent investor.
As an investor, this is good news-in a way. While the idea to buy a delinquent mortgage sounds good on the surface, it’s a risky investment that, unless you’re intimately familiar with the process can be more trouble than it’s worth. However, if you’re a high-risk real estate investor who isn’t afraid of highly-involved research, one-on-one sales pitches and complicated transactions, purchasing delinquent mortgage notes might be right for you.
The first step in the process is to look for properties which are facing foreclosure or other default on their loan. For the average investor, this can be tough to find. Information on foreclosed properties can be found through lenders, title companies and, in some cases, the government or federally regulated programs such as HUD (Housing and Urban Development). This is where the heavy research comes in. But this is only step one.
Once you have some potential property addresses in hand, you must research the market and determine whether the property would make for a worthwhile investment. While purchasing a delinquent mortgage doesn’t equate to owning the property, it does mean that you’d have an investment interest were the homeowners to default on their loan. Make sure it’s a property that, if push came to shove, you’d want to own.
Next, you’d need to talk with the property owners to discuss the possibility of selling their mortgage, as well as the terms and conditions for the transaction, were you to purchase the note. The cost to buy a delinquent mortgage varies based on several factors: the amount of down payment, interest rate, term of the loan, monthly payment amount and the current note owner’s credit rating and history. Your attorney should be able to help you with drafting the legal paperwork; you, however, should be prepared to come up an informed purchase price and rates with which to negotiate with the homeowners.
Once you have a signed contract, the money and paperwork is sent to an escrow company who handles the disbursement of funds once all of the contract contingencies have been met. An appraisal is usually done as well, to ensure your investment. Assuming that it’s a smooth transaction, in the end, the homeowner will receive a check while you receive the note. You are now acting as their pseudo- ‘mortgage lender’ and are assuming all responsibilities as such, including risks of late or missed payments, unpaid property taxes, insurance coverage, loan defaults and more.
Ultimately, it’s not easy for private investors to purchase delinquent mortgages. But with some diligent research through the web sites of local government agencies and HUD (Housing and Urban Development) programs, the information can be acquired. There are also several books available on the process of buying foreclosed properties or delinquent mortgage notes; try your local bookstore. Lastly, there are professional mortgage note brokers or note finders who will hunt for mortgage delinquencies and either purchase them for themselves, or pass them on to private investors. Several web sites and companies offer such a service; find them by doing a general search online.