My understanding of paper mortgage accurate? - Posted by Anonymous Newbie

Posted by Ben (NJ) on January 27, 2002 at 08:22:08:

that jumps out at me is your use of the phrase “you decide to create your own paper mortgage to sell to a private investor”. Then you go on to describe what is in essence the basic giving of a mortgage to a private investor. These are two different things. I think you are confusing concepts of “carrying back paper” and then selling that paper on the secondary market with the simple act of using the property as collateral for
a mortgage loan. You are doing the latter. Secondly, I realize this is a hypothetical but I would hope you have your financing lined up LONG before you sign a contract to come up with $50,000 and don’t begin looking for money POST-contract. If you don’t come up with the money you will lose any deposit as well as credibility. As far as the terms of the loan, I think that needs some clarification. You completely forgot about points, with a hard money lender you will pay at least five points (5 percent of the loan amount
or another $3250) plus you may have to pay fees for
the lenders appraisal and closing costs, etc. Furthermore, although hard money in theory means
you will get 65% of the value of the property, some lenders still want you to have some money in the deal
therefore will only loan you 65% of your purchase price (the $50,000 or $32,500). You need to redo your payment structure accounting for the points and other costs etc.

My understanding of paper mortgage accurate? - Posted by Anonymous Newbie

Posted by Anonymous Newbie on January 27, 2002 at 02:41:47:

Okay, I’m extremely new to this and am trying to understand how to buy foreclosures and create your own mortgage. The following is an account of what I understand would happen in a hypothetical example, in which, let’s assume, the private investor is a man.

Please, please clarify any misconceptions or erroneous transaction descriptions. Point out anything that is obviously misunderstood by me, and shine a little light. Thanks!


You attend an HUD auction and bid on a house that you have estimated to be worth $100,000.

You win the highest bid at an HUD auction for a house. Your bid is for $50,000.

After having won the bid, you sign a contract with the HUD that says you owe them the $50,000. You know need $50,000.

You decide to create your own paper mortgage to sell to a private investor. You place a classified ad and attract the interest of a private investor.

You dicuss the deal with the private investor. He agrees the house is worth $100,000.

You write the paper mortgage with the investor. 1) You agree that he will write you a check for $65,000. This is the mortgage amount. 2) You agree on an interest rate is 12%. 3) You agree that the loan period is one year with payments due once a month. This means that by one year, you must have payed him $65,000. This also means that the interest rate is %1 per month 4) The mortgage calls for “interest only payments.” This means that for each month the $65,000 has not been received, you owe the $65,000 plus 10% of your remaining balance as of that month.

The private investor writes you the check for $65,000. You write a check to the HUD for the $50,000 you owe. This settles your debt to the HUD.

You decide to repair the property using $5,000 from the $15,000 remaining after receiving the $65,000 check, then paying off the HUD. This leaves you with $10,000 cash.

One month passes while you repair the property and your first mortgage payment is due to the private investor. The balance is now at $66,000 because the entire mortgage of $65,000 has not been payed off.

You write a check to the private investor for $1,000 to pay off the interest incurred, using funds from your remaining $10,000 after HUD payoff and repairs.

Midway through the next month, you find a buyer for the house, which is now entirely fixed up and done being repaired.

You and the buyer agree that he will buy it from your for $80,000. He gets his money wherever, and write you a check for $80,000.

You cash the check for $80,000 from the buyer. You write a check for $66,000 to the private investor. This settles your mortgage to the private investor. You destroy the paper mortgage.

Your end result is that you have $9,000 left over in cash from the private investor’s check, and $14,000 from the buyer. You have no debt and have made $23,000.

The END (finally!)

Re: My understanding of paper mortgage accurate? - Posted by Ken (ILL)

Posted by Ken (ILL) on January 27, 2002 at 09:18:09:

There is 1 misconception you have about mortgages. The person or company that lends the money to the buyer will create a mortgage binding the loan to the property. The person buying CANNOT create a mortgage.
It is very easy to get twisted around when you are first starting to work with paper.
One thing Ben said is SO TRUE… DON’T go off and sign onany property the you intend to buy without first have your money source lined up. You could be trying for months trying to find the hard money lender that will loan you strictly on your property. There are some that will even give you a construction loan included. They MAY even lend to you, using good CMA’s, 65% of the REPAIRED value of the home. You must remember that THEY will be holding a mortgate against your house. You will be responsible for paying it off like a regular loan (Even interest only). When you have a buyer the finally goes to the bank, then you pay off all debts owed on the property and what shakes out is yours.