Q: Am I Personally Liable to Pay on My Defaulted Mortgage?

A: The primary source of a mortgage lender’s recovery in the event the property owner defaults is the real

estate held as collateral, not the owner personally. To satisfy an unpaid mortgage debt, the lender is forced

to first sell the secured property by completing one of two types of foreclosure sales to satisfy the amounts owed:

  • a judicial foreclosure; or
  • a nonjudicial foreclosure.

Occasionally, the fair market value (FMV) of the property is insufficient to satisfy the debt through bidding at the

foreclosure sale. If the high bid is less than the debt owed on the mortgage, the lender suffers a loss, called a deficiency.

However, to collect on a deficiency, the mortgage lender is very limited in California. The most common type of foreclosure action in California is nonjudicial. When a lender completes a nonjudicial foreclosure sale though a trustee’s sale, they are barred from recovering their loss on the mortgage, except for intentional waste to the secured property.

Further, California has established anti-deficiency laws which bar lenders from collecting losses due to any type

of foreclosure sale on a nonrecourse debt, also called purchase-money debt.

Nonrecourse debt includes:

  • purchase-assist financing secured by a one-to-four unit residential property occupied by the buyer;
  • carryback seller financing evidencing the installment sale of any type of property which becomes the sole security for the debt; and
  • refinanced purchase-money mortgages, to the extent the funding is applied to discharge the purchase-money mortgage (including fees and costs associated with the refinance transaction). Every other type of mortgage is a recourse debt. The homeowner with a recourse mortgage is personally responsible for the payment of the debt. Recourse debt includes:
  • business-purpose mortgages secured by any type of property; and
  • all mortgages secured by a:
  • second home;
  • property containing five or more residential units;
  • commercial property; and
  • one-to-four unit, owner-occupied residence when the mortgage is a home equity line of credit

(HELOC) to the extent funds were advanced for purposes other than the purchase, construction or remodel of the property.

When a recourse second mortgage is wiped out by the foreclosure sale of a first mortgage holder, the wiped-out

lender may pursue a money judgement against the property owner to recover the debt. The exception: mortgages insured by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) are subject to government recovery of these unpaid mortgage debts and have recourse against the homeowner. However, the FHA and VA rarely pursue deficiency judgments, though they have legal authority to do so.

I am an investor and, although I hold a real estate sales associate license, I am acting as an investor. However, if you would be best served through the traditional listing process, I will be happy to assist you there, as well.

Ed Wojtowicz                BRE #: 01754533                       (951) 901-8153

What happens when I’m late on a mortgage payment?

A: The late charge provision in a mortgage calls
for an additional charge if your payment is not
received by your lender when due or within a grace
period.
The minimum grace period before a mortgage
encumbering a one-to-four unit, owner-occupied
residential property is delinquent is ten days after the
due date without receipt of the payment — even if no
agreed-to or a shorter grace period is stated.
If you fail to pay a late charge when demanded, it is not
a material breach of your mortgage. As a non-material
breach, the failure to pay a late charge alone is not
grounds for your lender to initiate foreclosure.
To be enforceable, the late charge may not be punitive
in amount, as in an effort to coerce timely payment.
The amount needs to be reasonably related to money
losses incurred by your lender due to the delinquency.
The late charge on any mortgage secured by an
owner-occupied single family residence (SFR) is
limited to the greater of:
• 6% of the delinquent principal and interest
installment; or
• $5.
Lenders give notice and make a demand for the late
charge by providing the borrower either:
• a billing statement or notice sent prior to each
payment’s due date stating the late charge
amount and the date on which it will be incurred;
or
• a written statement or notice of the late charge
amount sent concurrent with or within ten days
of mailing a notice to cure a delinquency.
For mortgages secured by a one-to-four unit principal
residence, the lender is not permitted to assess
more than one late charge per delinquent monthly
installment, no matter how many months the payment
remains delinquent. Additionally, the late charge may
only be charged on principal and interest payments,
not on impound amounts or unpaid late charges

Ed Wojtowicz, Sales Associate

CalBRE Lic# 01754533
Contact: 949-500-7869

Equity Plus Realty

Richard Cerda, Broker

CalBRE Lic# 00464898

Contact: (951) 323-6289

Payment Histories Increase Note Values

Want top dollar when selling mortgage notes?

Increase the value with payment histories!

Keeping an accurate record of the payments received on a mortgage note is essential for knowing how much the buyer still owes.  This also establishes a record of their payment habits – with an added benefit.

The value of a note can be improved by presenting note buyers a verifiable payment history!

There are two main ways to keep track of payments on seller-financed mortgage notes: 1) outside serviced, or 2) seller direct.

Professional Mortgage Note Servicing

The first and easiest is to let a professional handle it. The payments are made to a third party servicing agent that keeps track of the balance and sends the money along to the seller. They will also send out the annual 1098 Mortgage Interest Statements and can hold original documents in safe keeping.

The DIY Approach to Collecting Payments

If a seller chooses the “Do-It-Yourself”’ method over a third party pro they will need to follow these steps:

1. Place original note and other original documents in a safe deposit box.

2. Make a copy of each check or money ordered received. Accepting cash is not recommended since it is hard to verify the payment history without a paper trail.

3. Deposit the payment and keep a copy of the bank record of deposit.  It is best to deposit each payment separately rather than combining with other checks.

4. Create a ledger or spreadsheet reflecting the date and amount of payments received.

5. Calculate the amount applied to interest, principal, late fees (if any), and the resulting principal balance. An amortization schedule or financial calculator can be helpful. Once calculated, record in the ledger.

6. Send out an annual statement to the buyer or payer along with the IRS1098 Mortgage Interest Statement.

7. Verify the real estate taxes and property insurance are being kept current. Consider establishing a tax and insurance escrow where the buyer pays 1/12th of the annual amount into a reserve account each month.

8. Send collection letters as necessary for late payments, lapsed insurance, or delinquent real estate taxes.

Why Note Buyers Want Payment Histories

When an investor agrees to purchase a note they will request a payment history. A verifiable payment history can improve the value of a note as it provides proof of timely payments. A payment history is considered verified when it is either provided by a third party or is backed up by the documents and records outlined above.

Unfortunately many sellers fail to keep track of the payments received. When they go to sell the note, contract, or trust deed they try to recreate the history from memory. Without any proof of payments received, a note buyer has to go on faith. Sometimes a payment history affidavit can substitute for a payment record but it still doesn’t add the value of verifiable proof.

Protect the value of your mortgage note! Set up a payment tracking method today.

Avoid Three Seller Financing Mistakes

Would you rather have $97,000 to sell your $100,000 note or only $80,000? The difference in usually comes down to the big three. Here’s the three biggest mistakes note sellers make and how to avoid flushing money down the drain.

Mistake #1 – Failing to Check Credit

The payer’s credit report lets you know how timely they have paid bills in the past. This is a good indicator of how they will pay on a seller-financed note. It also has a huge impact on how much an investor is willing to offer, should the seller ever decide to sell the note payments. Sadly, many sellers never check credit when offering owner financing.

The seller financing solution?

Have the buyer fill our a simple one page application that grants permission to pull their credit upfront or ask the buyer to pull their own credit and provide the report. Whenever possible, avoid accepting owner financing from any buyer with a credit score below 650 (above 700 is ideal).

Mistake #2 – Charging a Low Interest Rate

Money today is worth more than money tomorrow. A simple look at escalating food and gas costs will show a dollar today won’t buy as much next year or the year after! This concept, known as the time value of money, plays a large role in investor note pricing.

All factors being equal, an investor will pay more for a higher interest rate note. We’ve seen sellers charge 5% or less on notes. Imagine the discount when an investor wants a 10% yield!

The seller financing solution?

Charge at least two to four percent above the standard bank loan rate for a similar loan transaction. Be sure to take into consideration the credit, property type, and down payment, which may justify further increases in the interest rate.

Mistake #3 – Low or No Down Payment

The down payment determines how much equity the buyer has in the transaction. The greater the equity, the less likely a buyer will default. There is a reason banks require mortgage insurance whenever a buyer puts down less than 20%!

In desperation, some sellers will even accept a zero down payment. Unfortunately, these buyers have even less at stake than a renter. A renter at least has a security deposit along with the first and last months rent!

The seller financing solution?

Require a down payment of at least 10% to 20% at closing.

So these are the BIG three when it comes to valuing a seller financed note. Sure other things come into play (including property type, seasoning, terms, etc) but these are the three that impact pricing the most.

While a seller might not be able to find a buyer that meets the ideal in each category, they can attempt to compensate for any deficiencies. For example, a lower credit score might result in a higher down payment and interest rate. A great credit score might result in a more favorable interest rate.

Just remember that when the buyer receives a break, it’s coming out of your pocket as the seller!

Why Sell My Mortgage Note?

Accepting payments on the sale of real estate might have made sense at the time, but circumstances change.

Many sellers discover they would now prefer cash today rather than the small amount that trickles in each month.

Here are just a few reasons people have sold all or part of their seller financed mortgage notes for cash:

more “Why Sell My Mortgage Note?”

Inflation & Recessions: Success Using Owner Financing

Inflation & Recessions: Success Using Owner Financing

housing recessionThere’s a lot of talk about what’s going to happen if inflation starts to show up in our economy.

With Owner Financing I have found you will not be affected negatively.

The question is, “What is the market?”

The CASH MARKET and OWNER FINANCE MARKET are two completely different markets.

When the recession of 2008 hit I was able to take advantage of both markets. I took back 35% of my owner financed homes. I was able to recapture any appreciation that had happened from the time I bought the house until the time they moved out…some had paid for up to 6 years and then simply disappeared.

When the recession hit, the prices of houses in San Antonio dropped about 15% to 20% in the nice areas and about 10% to 15% in the lesser parts of town, where fewer buyers could qualify for a loan. Then they raised the credit score bar from 580 to 650 to qualify for a long-term government backed loan. Now, NOBODY in the LESSER PARTS OF TOWN could qualify for a loan and the prices dropped 30%.

House prices dropped back to the times I was writing about in my book MY LIFE & 1,000 HOUSES (I was writing about my real estate dealing between 1996 – 2008).

Here’s the BIG weird dynamic…

  • What happens to rents when no one can qualify for a loan to buy?
  • When people can’t buy, what happens to rents?
  • Do rents go down? …or do rents go up?

Rents go up!

The Owner Financed Value

Suddenly, in the recession, I was buying houses for what I used to pay for them 12 years ago. I was buying with other people’s money (OPM) and then owner financing those houses to renters who wanted to own. I based my sales price on the rents. If a person can pay $850 for rent, then I’d back into my sales price based on that monthly rental payment. The goal was to sell this renter a home for the same monthly payment they were paying for rent.

For the full effect of this example, know that I acquired the property and am “all in” for $35,000.

So, I want to sell my property and I want to establish a viable Owner Financed Value… I establish that the rents in the area for this particular type of house are $850.

$850 rent
– $100 property taxes
– $  50 for Insurance
=$700 left over for Principle + Interest

It’s easy to establish very accurate rent numbers online. You can do it in minutes while sitting in front of a house if you have a smart phone or if you have a laptop with a link to the internet. Use RentoMeter.com, Trulia.com and Zillow.com for starters.

$700 payment means the buyer can afford to finance $70,000
(If you use the terms 10.5% for 20 years)
The exact amortization payment is $710.66….close enough!

So if the buyer can afford to FINANCE $70,000, what is the sales price?
Add 10% as a general rule.
$77,000 is the sales price!

So if the goal is to move a person from renting at $850 to buying at $850…
What happens to my sales prices if rents are going up?

That’s right…during the recession my owner financed houses were appreciating as far as I was concerned.

It was the perfect storm; Prices on little houses were falling because no one could get a loan. I was buying those houses with Private Money (Money from Private Lenders) at rock bottom cash prices. But the OWNER FINANCED VALUE of the houses was rising like a rocket because the rental pool was flooded with demand! My spread was getting bigger at both ends; I was buying for less and selling for more.

To top things off, I was getting much better buyers than I had ever seen, and the buyers were better payers and had more down payment than I was use to getting.

REMEMBER: Back then we DID NOT have to get an appraisal to sell a property with owner financing – period! Today, as long as the buyer is a qualified buyer; meaning the buy has enough income to make the payment – Qualified Mortgage (QM). As long as it’s a QM we don’t need an appraisal.

I hate being a landlord so much; I think I’m going to stick to my owner financed model through the upcoming turmoil. I’m thinking, I won’t get rich but I won’t go under either.

My losses to inflation will be offset by the houses I get back and by my ability to double my money when I buy in the down times. Also Rents will go up to the market value and people will still WANT to buy homes even more.

rent or buy owner financing

To believe in this model you have to believe at least 2 things;

#1. People would rather own a home if it costs the same as rent.

#2. There is a line of renters waiting to buy your home if the current payer fails.

And perhaps there is a 3rd thing you need to believe in….

#3. Wealth comes from chaos

About The Author: Mitch Stephen has sold over 1400 homes and is the author of “My Life & 1,000 Houses, Failing Forward to Financial Freedom”. He uses the technique of “Owner Financing” to create cash flow without the hassles of landlording.