Mortgage Note Categories: Mortgage Note Investing

 

Mortgage notes are of two types, first lien or second lien. What are those? Let's learn in detail.

 

Mortgage notes can be classified according to various categories, especially, lien position. You need to understand these note investing training concepts.

 


Let's see these lien positions. The first-lien mortgage notes are the ones that are most likely to receive payments. These will be paid first, as they come up first on a priority basis. Most mortgages come under this category.

 

Another thing that acts as a differentiator between the two is the associated risk. First lien mortgages are less risky because the investor is guaranteed to have regular payments.

 

A second lien mortgage will receive payment only if the first lien one is paid. This means in cases of foreclosure, the investor holding the 1st lien note will receive the proceedings first. Naturally, the 2nd lien will come in the line of succession.

 

Borrowers also choose the former category to easily get rid of debts too. And this is generally the first preference by all parties. Only in cases of delinquency, second lien notes are performed.

 

Some categories of 2nd lien mortgage notes are as follows:

●     Home Equity of Credit (HELOCs)

●     Down payment assistance

●     Credits

Are there any benefits to investing in 1st lien notes?

As mentioned earlier, first-lien mortgage notes are secured by collateral. As an investor, you don't have to worry about not receiving payments. And if you want to sell these notes, you can sell them for higher prices, irrespective of they are performing or not.

 

Are there any risks to investing in these notes?

Technically, there are no risks. But one needs to watch out for taxes, insurance, and collateral value. Also, they need to understand if the note is violating any rules. Similarly, one needs to know if the Homeowners Association is receiving the dues regularly.

 

In those cases, the lender will have to pay hundreds of dollars in fees to avoid foreclosure. If taxes are unpaid, make sure to pay that on time, or it can lead to unfavorable situations.

 

Now that we have discussed 1st lien notes, it's time to discuss 2nd lien ones. If you are buying these notes, you will get them at discounted rates, depending on equity and pay position.

 

If you are looking for maximum profits, then this is the best way to go. Yes, there's still a way to foreclose the mortgage, if that's what the situation demands. If the borrower does not pay the amount, even after understanding that the property is going for sale, then the power shifts to the lender. He can decide whether to sell the property or not.

 Read  More: Commercial Real Estate Note Investment: A Guide

Are there any risks associated with these notes?

It solely depends on the condition of the first mortgage. Therefore, it's essential to check the condition of those notes. In cases, where the borrower applies for bankruptcy, the lender can suffer greatly, in cases of little to no equity.

 

As per the trainers of note investing training, it's up to investors to decide whether to invest or not and on which one.

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