When you purchase a house, if you don't have enough money to buy the home outright, you can expect to obtain a loan from the bank. The financial institution lends you the money to purchase the home as well as in return you allow them an itemized promise that if you don't reimburse them they are able to sell the home to have their money back. That's really all a mortgage is.
In that written promise, there's usually two documents. One document sets out whenever they can sell your house. It protects you so long as you do everything you promised to do. The other document says how much your debt and how much you're going to pay each month. This second document is the "mortgage loan note".
The bank will keep the original mortgage loan note safe in their vaults. Sometimes, what the law states allows them to "sell" your mortgage to another bank, lender or even a private investor. In that case, they'd send your mortgage to another bank to acquire cash or other things of value. You would then make your normal repayments to the new bank or investor.
Buying Mortgage Notes
There is a market for buying mortgage loan notes, like the way you can buy shares inside a publicly traded company. You have to find a company that buys and sells the notes. Think of them the way you would having a broker for buying stock market shares.
Be sure you do thorough research on any notes before you buy. Mortgage notes can be sold in groups a treadmill by one. Remember, on the other hand of each note is a person with a job, family, car, etc. Someone who "has to pay the mortgage" each month. Seek information as though they had come directly to you for a loan. How likely are they to keep paying you over the next Ten years? How they have gone so far in meeting repayments? Should they have kids, how old could they be and will the costs of providing for the children increase or down?
Then think about your own financial situation. What are you going to do when they neglect to pay? Would you understand the steps you have to decide to try foreclose the property if they can't keep paying? Many people can't handle the emotions of kicking a household out of their house; can you?
Items to Watch Out For
One of the biggest trouble for buyers of mortgage notes is the chain of ownership. You need to have all the documents proving the original note was transferred from the initial bank for you. Each step of the way needs to be in place. Look at the original note, then for a document transferring from that bank to another bank, then to the next, etc to you. Each document must be a legitimate transfer, according to the rules of that state. If you're not sure, run the documents by a cpa or lawyer who has experience of mortgage notes.
Another possible pitfall for that new mortgage note investor is overpriced notes. Try to look for someone you know and trust that has experience buying notes. They can assist you to determine whether you're paying too much. Before long you will get better at calculating that yourself. Keep in mind, whether it sounds too good to be true, it probably is.
Buying mortgage loan notes is a reasonably high risk strategy. While it can be tempting to jump in when you see a good deal, be sure you can handle the danger and also have enough financial stability that you'll be OK when the investment becomes worthless.