How to Buy Default Mortgages From Lenders
All banks, credit unions, and other mortgage lenders have loans in varying stages of delinquency or default. Those in a position to buy some of these loans can make a great deal of money. However, many lenders do not advertise their desire to sell these notes for fear of damaging their image. Interested buyers must approach lenders carefully and must have sufficient financing or funds to complete a purchase as agreed.
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Instructions
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Get all finances in place. This step is critical. Default mortgage loan purchases happen much faster than many people realize. Hard cash or access to financing must be in place before you contact any lenders. The banking and mortgage lending industries, although involving hundreds of millions of dollars, are amazingly small communities. A portfolio purchase that a buyer cannot complete may eliminate future opportunities.
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Decide on the types and sizes of loans for which to bid. Larger lenders typically wish to sell large portfolios of of default mortgages ($5 million and above), while smaller lenders (including credit unions and private lenders) may wish to sell smaller groups or even individual loans. Available funds will dictate the size of a reasonable purchase. Type (primary residence, investment home, commercial mortgage) is also important.
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Contact lenders to indicate your interest in purchasing default mortgages. Ask if they would like to sell some "nonperforming" mortgage loans. Learn the proper terms as lenders operate using this language. Indicate the types of loans in which you're interested.
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Ask for a spreadsheet that includes a borrower identification or loan number, balance, inception date, interest rate, monthly payment, next payment date, last payment received, maturity date and payments due. This gives you a picture of the loan(s) you might buy.
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Calculate the potential for collection and the approximate amount of the loan(s) that may be received. Include the fair market value (FMV) of the collateral (real property) in the calculation. This is important in helping you decide whether to buy the loans and what price to offer.
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Perform due diligence. Examine some or all of the loans in the package. Carefully analyze the original documents included in each loan file. Make sure they are authentic, particularly loan notes and security agreements. Be sure the collateral and title are valid and that you have the ability to foreclose on the loans if necessary.
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Make an offer and be prepared to negotiate. Most lenders will assume that the original offer to purchase is not the final offer. Negotiate the final price only up to the maximum that projects to deliver profit on the package as a whole.
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Tips & Warnings
Realistically estimate the value of the real estate and mortgages to be purchased.
Calculate a real estimated legal and collection cost when projecting profit.
Be sure the loan documents display a valid lien on the property.
Closely examine the title search data to ensure there are no infringements on clear title.
References
Resources
- Photo Credit monetary street image by Yuriy Poznukhov from Fotolia.com
