Whenever you buy a house, without having enough money to buy the home outright, you will usually obtain a loan from the bank. The financial institution lends the money to purchase the home as well as in return you allow them a written promise when you don't reimburse them they can sell the home to get their money back. That's really all a home loan is.
In that written promise, there's usually two documents. One document sets out when they can sell your home. It protects you as long as you do everything you promised to complete. Another document says how much your debt and how much you're going to pay each month. This second document may be the "mortgage loan note".
The bank could keep the original home loan note safe within their vaults. Sometimes, what the law states enables them to "sell" your mortgage to a different bank, lender or perhaps a private investor. If so, they would send your mortgage to the other bank to acquire cash or any other things of worth. You would then help make your normal repayments towards the new bank or investor.
Buying Mortgage Notes
There's a market for buying mortgage loan notes, like the way you can buy shares in a publicly traded company. You have to find a company that buys and sells the notes. Think of them the way you would with a broker for purchasing stock market shares.
Be sure you do thorough research on any notes before you buy. Mortgage notes can be bought from groups a treadmill by one. Remember, on the other side of each note is a person with a job, family, car, etc. Someone who "has to pay for the mortgage" every month. Seek information as though they had come directly to you for a financial loan. How likely are they to keep paying you within the next Ten years? How they have gone to date in meeting repayments? Should they have kids, how old are they and will the expense of providing for the children go up or down?
Then think about your own finances. What are you likely to do when they neglect to pay? Would you comprehend the steps you have to take to foreclose the home if they can't keep paying? Some people can't handle the sentiments of kicking a household out of their house; are you able to?
Items to Look out for
One of the greatest trouble for buyers of mortgage notes may be the chain of ownership. You must have all of the documents proving the original note was transferred in the very first bank to you. Each step of the way needs to be in place. Look at the original note, then for any document transferring from that bank to another bank, then to another, etc to you. Each document should be a valid transfer, based on the rules of this state. If you aren't sure, run the documents by an accountant or lawyer that has experience in mortgage notes.
Another possible pitfall for the new mortgage note investor is overpriced notes. Try to look for someone you know and trust that has experience buying notes. They are able to help you determine whether you're paying too much. After a while you will get better at calculating that yourself. Just remember, if it sounds too good to be true, it likely is.
Buying home loan notes is a reasonably high risk strategy. Although it could be tempting enter into if you notice a bargain, make sure you can handle the risk and also have enough financial stability that you'll be OK if the investment becomes worthless.