Five Critical Mistakes Private Mortgage Investors Make

The five critical mistakes listed here are certainly not the only mistakes private mortgage investors make, but they are common mistakes that are repeated over and over until a hard lesson is learned. Avoid these critical mistakes and you will be a much better private mortgage investor. Learn from the mistakes of others!

1. First Critical Mistake: The Mortgage Investor Does Not Inspect The Property That Is Or Will Be Mortgaged.
Would you negotiate a price to buy a car without seeing it? Would you negotiate a price to buy a house without seeing it? Well if you commit your money to a mortgage without seeing the real estate it is just like buying that house (real estate) without seeing it. Why? Because, if you have to foreclose on the property that you did not physically inspect before you committed your money, then it is just like negotiating a price to buy the house without having seen it. Only the foolish would buy a house without seeing it.

Let us imagine for a moment that you have to foreclose on a house you did not see with your own eyes before closing the mortgage transaction. Sometime during the foreclosure process you go to the property to see what soon will be yours. Surprise! Surprise! It is not what you thought it was or what you were told it was. You were shown pictures of the house before, but now it just does not seem like that house you saw in the pictures.

You knew it was wood frame, but you did not realize (until now) that when you walk up the stairs of the front porch your foot breaks though the wood. As you walk through the house you soon find out the house is infested with termites and seems ready to collapse.

You begin to panic thinking you made a big mistake investing in this mortgage secured by this property. Then, you remember that at the closing you only invested or loaned 40% of the perceived value of this house. Now you begin to think, 'if I have to bulldoze the house down and just sell the land; then I will probably come out even, and everything will be OK'.

But wait! Right then, as you are walking back out the front door you see the neighborhood is not what you thought it was or what you were told it was. This house, which will soon be yours, is across the street from an abandoned gas station that has a hazardous waste sign on it from the Environmental Protection Agency. That sign can often mean that the ground around that gas station (within hundreds of feet) is also contaminated. Now, you not only have a house that you cannot sell, you also may have a property that will costs thousands of dollars to clean up. What a nightmare! Do not think this has not happened. How do you reduce this kind of risk as a private mortgage investor? Go look at the property before you commit your money to the mortgage! Appraisals can help reduce some of this risk, but not as well as you physically looking at the property for yourself!
2. The Second Critical Mistake: The Mortgage Investor Fails To Require A Flood Check Before Closing The Transaction.

How many private mortgage investors had their money invested in mortgages in the New Orleans area in 2005 or Biloxi, Mississippi without making sure these properties had federal flood insurance? You know they are crying 'The Blues' now. After Hurricane Katrina, how many of these mortgage investors wished they had checked to see if the mortgaged property had flood insurance?

Typical homeowners insurance policies do not cover for such floods. The mortgagee (investor) needs to be sure they are listed as a loss payee on the homeowners policy, but when it comes to a flood those policies do not protect the homeowner or the mortgage holder. Private mortgage lenders often fail to check the flood zone of the property they are going to loan against or the property securing the mortgage they are going to buy.

There are a number of private companies out there that will do the check for you, or you can have your surveyor put the flood zone information on the survey. The appraisal also has a place to make note of the flood zone, but that is not as accurate as a survey. Sometimes, the property is at the edge of a flood zone and only a survey can determine the properties exact flood zone status.

As a private mortgage investor you need to know the flood zone of the property that is mortgaged or going to be mortgaged. If the property is in a federal flood zone make sure the borrowers have the federal flood insurance in place or are getting it in place. This protects the borrowers (note signors) as well as the investor who owns the mortgage. They can get it in place through their own insurance agent. Having a survey with an elevation certificate issued by the professional surveyor may save the borrower some money on the costs of this federal flood insurance. The elevation certificate helps to measure the exact risk within a particular flood zone.

3. Third Critical Mistake: The Mortgage Investor Makes Or Buys A Mortgage That Is Not A First Mortgage.

Successful private mortgage investing is dependent on a number of important factors. One of these most important factors is known as The Loan-To-Value Ratio or LTV. The LTV formula is simply the amount of the loan divided by the value of the real estate. A $100,000 first mortgage loan against a $200,000 property is a 50% LTV ratio. A 50% LTV ratio is a typical private mortgage investment.

However, if the borrower owes $40,000 on a $200,000 house and they want to borrow $60,000 as a second mortgage interest only loan from a private mortgage investor. What would be the LTV ratio for that second mortgage? Well, it would be the same thing as the above scenario a 50% LTV. Yet, the risk for the second mortgage holder here is greater than the risk for the mortgage holder who is owed $100,000 on a first mortgage against the $200,000 house.

The problems begins for the second mortgage holder when he finds out three years later that the first mortgage is going into foreclosure. The first problem is that the borrower now owes $71,000.00 on the first mortgage. He is over 30 months behind on the first mortgage, which is also with a private investor who is charging 18%. The first mortgage holder did not foreclose sooner because they felt well secured and tried to work with the borrower to resolve the financial crises. The interest has been adding up fast.

The second problem for the second mortgage holder is the mortgagor (borrower) is counter-suing the first mortgagee because the borrower thinks the original first mortgage was not disclosed properly. Now things are dragging out for another two years. Now the first mortgage balance owed is over $100,000 with back interest, late charges and attorney fees. The borrower eventually loses the case, but the borrower decides to appeal. They lose the appeal, but now the balance owed on the first mortgage is $115,000.00. Now your $60,000 second mortgage is an 87% LTV.

Now if the mortgage investor wants to protect his $60,000 interest in the property he will have to pay off the $115,000. Need I say more? Many more risks come with making a second mortgage. As a private mortgage investor you should not be taking unnecessary risks. Pass on the deal that is a second mortgage position. The best position a private mortgage investor can be in is a first mortgage. The very experienced mortgage investors know this. Do not make the mistake others have made, always be in a first mortgage position. Read your title commitment closely. Be sure that when you close, your position will be a first mortgage and that the title insurance is for that purpose! Make sure all liens shown on the title commitment are required to be paid. Make sure these liens are paid, either before closing (with releases in hand for recording), or paid from the loan proceeds at the closing.

4. Fourth Critical Mistake: The Mortgage Investor Does Not Veri