Considering Holding Second Mortage (foreclosure, second mortgage, mortgage, sale)

[gypsychic]

We are considering offering to hold a second mortgage on our listing we have for sale (listed with realtor). It is already well-priced, getting lots of showings, but no offers, and we were actually asked a time or two if we would do this.

We would check credit, do this for owner-occupied only, and hold for 3-5 years. I would also stipulate that we would receive proof of the first mortgage being paid on time, and that perhaps a third party collect and deposit our money to guarantee that it gets paid.

So, how risky would this be? And if the worst happens, and they stop paying, what would be involved on our end? I hope any real estate or law experts here on this forum can give me some thoughts or advice.

Thanks in advance!

[Silverfall]

I assume you would carry the second so they can do 100% financing?

First of all the lender would have to approve an owner carried second. Assuming they do...

For you the biggest risk is that you won't have first position, the main lender will. So if you are in a decling market area, and the first lender needs to foreclose then they get paid first. If the market is continuing to decline in your area, then this could be really bad for you, since there may not be any money left over for you to get paid.

The other issue you face is that you would be looking to carry a short term second, but if the market does not stabilize in that area in 3-5 years, then the home owner might not be able to refinance to cover the second. In 3-5 years so little has gone towards principal and they might not have enough or any equity for that matter to refi and pay off the second.

Whether or not this makes sense depends on what the market outlook is for your locale.

I guess if I were going to do this, I would have the second secured with a promissory note, making it a recourse loan. A nonrecourse loan means the house is the collateral for the loan and the only collateral. So if you the house goes into foreclosure then whatever you get out of the house is it. If you take a promissory note, then that is the collateral for the loan. An attorney would help you with this.

[dunroven55]

Originally Posted by Silverfall

I assume you would carry the second so they can do 100% financing?

First of all the lender would have to approve an owner carried second. Assuming they do...

For you the biggest risk is that you won't have first position, the main lender will. So if you are in a decling market area, and the first lender needs to foreclose then they get paid first. If the market is continuing to decline in your area, then this could be really bad for you, since there may not be any money left over for you to get paid.

The other issue you face is that you would be looking to carry a short term second, but if the market does not stabilize in that area in 3-5 years, then the home owner might not be able to refinance to cover the second. In 3-5 years so little has gone towards principal and they might not have enough or any equity for that matter to refi and pay off the second.

Whether or not this makes sense depends on what the market outlook is for your locale.

I guess if I were going to do this, I would have the second secured with a promissory note, making it a recourse loan. A nonrecourse loan means the house is the collateral for the loan and the only collateral. So if you the house goes into foreclosure then whatever you get out of the house is it. If you take a promissory note, then that is the collateral for the loan. An attorney would help you with this.

Great Advice!!! If the banks are having problems with equity loans with all their experience and attorneys ; I wouldn't recommend you get into this situation and perhaps lose everything!

Dunroven