Buying Mortgage Notes As An Investment

The investment of buying mortgage notes can be a sound investment that provides secure returns on the money invested, without the problems of buying fixer-upper homes, as well as spending all the time and money it takes to flip them on the open market. When the topic of mortgage notes comes up, we normally think of the giants of the mortgage industry being the ones who are involved in such transactions; companies such as Wells Fargo, Bank of America and other huge corporations.

mortgage document by TheTruthAbout, on Flickr

Understand The Market First 

There is an underlying aspect of this market, however, in the private mortgage markets and these can come in several forms. One area that is very prominent in this phase of the mortgage market is in the area of “seller financing.” This type of transaction occurs when the seller agrees to lend the money to the buyer in whole or in part, usually structured to be amortized over a 30 year period for the purpose of payment amount, yet having a balloon payment in five years This means that in five years, the outstanding balance of the mortgage will come due.

It is expected that the borrower will be able to refinance the mortgage within the 5 year period with a conventional loan from a commercial lender. If the loan is not paid within the 5 year period, the original owner can take back the house by foreclosing. The risk to the investor that would buy that note from the original seller would be that the net proceeds of the sale of the home when it is foreclosed are less than the balance of the note.

These Notes Are A Win-Win For Everyone

These types of loans are used to finance properties of borrowers who cannot qualify for conventional mortgages, yet have sufficient income to pay the freight. In this economy there are many self-employed people who have been stung by economic conditions who would fall outside of conventional parameters of mortgage qualification.

Because of the higher risk presented by individuals who will look good on paper, but may still be very risky in the arena of being able to really pay off the mortgage, the interest rates are higher than normal and this is what makes buying mortgage notes so attractive as an investment. Also, private mortgage notes are saleable in a ready secondary market and can even be bundled together in order to mitigate the risk.

A possible way that this technique can work for the original owner of the house is to collect the payments for a certain period of time from the new buyer, then sell the note to the “note buyer” for the present value of the note. Say on a $400,000 mortgage, the payments are made for six months and the present value is calculated to be in the $396,000 range. The original owner of the house is not out of the picture and the payments are made each month the to the person who bought the note. If the new buyer defaults on his payments or cannot come up with the financing, the person who is buying mortgage notes will own the property.

Hopefully, this article has opened your eyes to another type of investment you can use to make money, especially if the thought of using mortgage notes never came to mind. Make sure you understand the market and if  you’re not sure, consult a professional that can guide you through your first few transactions.