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First or second mortgages?Should you invest in only first mortgages or in second mortgages too?The borrower is required to make payments on both the first and a second mortgage. It is even possible to have a third or forth mortgage. However, the first mortgage, which becomes the first mortgage by being recorded at the county recorders office first, has priority in the event of mortgage foreclosure. If the first mortgage holder (lender or mortgagee) commences a foreclosure action they will have their attorneys do a title search. They will discover who else has a legal interest in the property. They will foreclose the interest of any second mortgage holders. They will also foreclose the interest of IRS liens, tenants, unknown spouses etc. IRS liens are a special case. After the foreclosure the IRS has a period of time, usually 180 days to either pay off the person who got the property back and seize the property, or they can release their lien. It is possible to contact them and ask them for an early release. Sometimes they will release their lien on payment of a small sum of money. It is unusual for the IRS to pay off the foreclosing party. But this can tie you up before you can sell the property to should really be spending money fixing it up. What does this mean in plain English? Assume the property is worth $100,000. There is a first mortgage of $80,000 and a second mortgage of $10,000. You own the second mortgage. The borrower stops making payments on the first mortgage (or deed of trust). And the lender forecloses the loan. By the time this loan goes through the legal system, the first mortgage balance could now be $90,000 and the house is probably not in great shape. The house is sold by the court (or trustee depending on the state). You have the right to bid at the sale and pay off the first mortgage and keep the property. But would you want to? And someone else can bid on the property and if they bid enough, you will be next in line to get paid what is left after the first mortgage is paid off. (Up to the balance of what you are owed). But it's not likely to happen. Another possibility is that you could keep the first mortgage current and foreclose your second mortgage. Most lenders will agree to this, but they may not be forced. to do this. Click here for the legal ruling on this subject. So the chances are that you will get wiped out. Does this mean you should never make or own a second mortgage? Maybe. But commercial lenders do make second mortgage loans. PROVIDED the borrower has good credit AND a reasonable cash down payment has been made. Typically a second mortgage like the $10,000 above would sell for $5,000-7,000 if it is behind a $80,000 first mortgage and the property is worth $100,000. By comparison, the $80,000 first mortgage would probably sell for about $70,000. Also you can reduce your risk if the Combined Investment to Value (CITV) ratio is lower. For example. Say the property is still worth $100,000 but the first mortgage is only for $70,000. The second mortgage is for $10,000. If you can buy this second mortgage for $7,000 the CITV is now 77%. ($70,000 first mortgage plus the $7,000 that you pay for the second mortgage divided by the property value $100,000). Of course if you buy the $10,000 mortgage for $7,000 your return on investment is much higher because your interest is paid on the $10,000 balance not the $7,000 you paid. Some people will take the extra risk and hope that the good ones will pay for the few bad ones where they will get wiped out. Others won't. It's your choice. Follow through the course using the links below or jump around if you prefer. Advertise your note broking business with the site ranked #1 of non-sponsored (paid) listings by Google and AltaVista.. Go directly to listings of mortgages and deeds of trusts for sale.
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