One question that is often asked is that “are mortgage notes safe and legally binding?”
Our answer is yes, they are. It is a document signed by both the lender and the borrower, making it a valid contract. When a lender signs it. It means he is offering the contract, and the other party is accepting it.
It shows the amount and the payment type, duration, and frequency. The entire note is centered around the amount itself. Of course, we need to keep the interest in mind while structuring the note.
What does this note include?
It is a loan agreement where all the conditions are laid out, and the time frame of the loan. Most investors don’t think that notarizing it is essential, but one can do it if he wants that.
If the note is signed by both parties, it is legal, notarized, or not. A business can use it to gain profits and capital from a venture. There must be a plan B to the entire procedure. A promissory note can be applied to various situations, including real estate. Before investing in mortgages, you must learn a little more about these notes.
Borrowers can pay the loan in different ways, let’s understand them bit by bit. Here are those options:
The first option is to pay the entire amount through a lump sum, or first make a down payment, and then pay the rest through installments. This option is only possible for small loans (in most cases), and huge loans.
For this option, the lender will inform the borrower about the last date, and the payment date.
Due on Demand
Another option that you can try, due is on demand. In this process, a lender can ask for the full repayment at any time, and the borrower will do it. This usually happens when the entire process occurs between friends and family members. This type of note usually doesn’t happen to have note terms. Although this is not the ideal thing to do, a lot of investors try this option.
The loans will be paid in installments according to the terms set previously by both parties. The installment will discuss how the amount will be distributed, and what the timings will be. The down payment amount, what happens when someone pays an amount greater than the amount decided, all must be decided.
These are the three best options you cannot present to a borrower. Always check which one can benefit both parties.
All the details should be mentioned in the public records. So, whenever the borrower and lender, or the regulator can access the data whenever required.
But while choosing a borrower, or mortgage notes, you need to perform due diligence.
You must check the entire history of the borrower to avoid unfortunate situations. The unfortunate situation will be the non-payment of the loan.
What can you do in this situation?
Let’s first check the late payment option. People can be late due to numerous reasons, mostly unavoidable.
If that’s the case, we investors can cut them some slack. But in some cases, it can be the opposite situation. Some people may try to take advantage of the situation, and your reluctance to do anything about it.
You must handle the situation carefully. You can let them get away for the first month scot-free, and then check what they are doing.
If they are not late in the next month or are willing to pay the late fees, then it’s all good.
If you think that the situation is getting out of control or you cannot handle it, you can always take assistance from a servicing company.
Are you thinking about the costs associated with it? You don’t need to, because it is nominal.
If the problem is temporary, then the company can do the needful, and fix it accordingly.
This is one type of issue you should know about.
But there’s one bigger problem you need to deal with.
What happens when the borrower cannot pay?
If the borrower cannot pay due to loss of the job, or death of family members (earning ones), there are three options:
This ensures that the property can be sold, and the lender is required to accept a lower payment. This benefits both parties and is often considered the best option in this regard.
Deed in lieu
This is the process of gaining ownership of the property directly from the homeowner (borrower). But always check if there are minor liens associated with it. It is an excellent alternative to foreclosure and forfeiture.
If the two options mentioned above are not found to be feasible, then the last option is foreclosure. But this is not ideal, because it will take a lot of time and procedures.
Of course, it will cost a lot, adding to your expenses and losses.
But it can be beneficial for you if no one is willing to pay a higher price than you at the bid. Other liens, especially, the lower ones will be eliminated.
If you encounter higher bids, it is essential to cash out before incurring any more losses.
What to do after a DIL or foreclosure?
You will have plenty of options to consider:
- You can sell the property to someone who wants to purchase it for cash.
- You can fix and sell the property once again
- You can try the option of seller financing, to either an investor or a homeowner.
Whatever you decide, you will ultimately reap the results. So, you must think before making any decision.
If you want to start Real estate note investing, you need proper guidance, from experienced note investors. You will get plenty of such investors at Note Conference.
If you are not believing me, you can check out the blogs mentioned here. If you think you want something specific, you can discuss it in the comments.