In recent years, the number of private mortgages has grown dramatically because such mortgages offer unique opportunities to borrowers who find it difficult to get one anywhere else.
The following are some of the benefits you can enjoy as a private mortgage lender:
- If you are lending money to borrowers who have been declined by banking institutions, you can charge a higher interest rate due to the risk you are taking. It is difficult to believe that private mortgage lending outperforms stocks and other traditional investments when it comes to returns.
- Since a property secures the loan, you can rest assured that your investment is protected. As a result, you will be in a better position if the borrower defaults since they have a greater amount of equity in the property than they would in a traditional loan.
- LTV (Loan-to-Value) rates available from private mortgage lenders range from 50 percent to 70 percent, depending on the property value.
While there are many benefits, as a lender, you will need to be careful when it comes to a private mortgage, as it carries some risk.
Continue reading to learn what you need to watch out for when lending and how you can best protect yourself and your investments.
Inspect the Mortgaged Property
In the event that you fail to inspect the property for which you are extending the loan, you could be in for an unpleasant surprise.
You could even be loaning money for a different house than what you saw photographed. Additionally, you need to check whether the property has been well maintained and has not suffered any major structural problems.
Second Mortgages Should be Avoided
If the property has an existing mortgage, be careful not to sign a deal on it, as it will affect your LTV ratio and increase your risk significantly.
If a borrower defaults and the foreclosure proceeds are not enough to pay off the first or second mortgage lender, you might lose the whole amount invested.
Verify Details on the Property Deed
Prior to signing any documents for a mortgaged property, you should ensure that the legal descriptions are accurate.
If you decide to take legal action against the borrower because of an incorrect legal description of the property, you could face problems at a later date.
Check If the Property Is Adequately Insured
Many mortgage investors have lost a great deal of money due to the lack of insurance policies issued to borrowers in flood-damaged areas (for example, during Hurricane Katrina).
You should ensure the borrower you are lending money to has adequate insurance coverage for natural disasters.
For those who are new to private mortgages, it’s best to stick with areas you’re familiar with since you’ll know the trends and developments in real estate.
Depending on the down payment, you may also recommend private mortgage insurance.
With this insurance, you’ll be protected if the borrower defaults due to a falling housing market. Additionally, it is vitally important to document all procedures to have evidence at your disposal for tax and legal purposes.
If you’re looking for mortgage investment services in Toronto, or if you’re simply looking to consult real estate mortgage experts about your potential future home, you can visit Northwood Mortgage. You can call us at 888-495-4825 or contact us online.