Thanks to today’s tough requirements, borrowers are often unable to qualify for loans from traditional lending institutions to purchase homes. Borrowers often find a more lenient avenue to acquire funds through privately owned mortgages.
What is a privately owned mortgage?
Private mortgages are transactions involving a lender that is not a bank or mortgage company. The advantage a private lender gains is the opportunity to accrue income through interest rates and other terms of the loans they extend. The borrower is able to acquire funds fairly quickly—creating a potential win-win situation for all involved.
Examples of a private lender could be someone you know (a friend or family member), or an investor (or group of investors) who has enough capital to extend funds for their own investment purposes. Self-directed IRAs can also participate in private lending, earning tax-sheltered income for retirement.
How to avoid foreclosures on a privately owned mortgage
Privately owned mortgage investments may present a steady source of income, but there is always the risk of the borrower defaulting on the loan. Learning how to avoid foreclosures—as well as what to do when the borrower is showing signs of default—is critical to the success of any investor in this realm.
The following are a few tips to help avoid foreclosure and protect the integrity of your investment:
Before extending the loan
Perform due diligence. It is imperative to fully vet the borrower. Background checks, credit checks and references from previous landlords, if any, is a must.
Consult with professionals. An attorney can help you ensure loan documents and mortgage agreements are ironclad, which is a plus if the borrower begins falling behind on payments.
After the loan is in place
If the borrower begins having trouble paying the loan, one of the most proactive steps you can take is to begin discussions of a loan modification. Depending on their financial situation and how willing they are to try to make things work, this may be helpful to all involved.
Agree on options for a modification. This can include the lender moving the accrued interest to the back end of the mortgage, lowering the loan payments to a more manageable amount for the borrower, or agreeing on additional collateral to back the loan.
There are many other moves individuals and investors can make to circumvent the pain and aggravation of foreclosure. Arming yourself with as much knowledge as possible before embarking on lending transactions can help you achieve the success you desire.
Watch our archived webinar on how to avoid foreclosures
For more details about avoiding foreclosures, watch this archived webinar on the topic, featuring guest speaker Tony Woodward of Woodward Law Group in Tampa, Florida. Woodward is an expert in this area, having practiced creditor’s rights for 26 years. He has also held these assets in his portfolio for years.
If you have questions about this article or want to learn more about investing with a self-directed IRA, please contact us.