Why Investing in 2nd or 3rd Mortgages behind Reverse Mortgages is Super Safe
If you are looking for double digit returns on your investments but don’t want to roll the dice in the stock or commodities markets, you definitely want to consider the possibility of putting your money into residential real estate. Even if you don’t have the money on hand to fund an entire private mortgage yourself, you can invest in mortgage funds or go in jointly with several other investors to fund a loan. This method is referred to as mortgage syndication or through a Mortgage Investment Corporation (MIC). One of the safest yet overlooked types of mortgage investments that still provide double digit returns is the second or third mortgage behind a reverse mortgage.
New to mortgage investing…What is a private mortgage? There are many mortgages out there that did not come from banks or other traditional lenders. There are thousands of people in western Canada who have the means to make a mortgage payment each month, but they don’t have the credit score or verifiable income to get bank approval; so private lenders exist to fill this gap. They make more interest than the banks do, because the loans that they are extending represent a higher degree of risk. Remember — with zero risk, as with government-backed savings options, you get almost zero in terms of reward, thanks to the rock-bottom interest rates.
What is a second or third mortgage? When people have equity in a house but still have some of their primary mortgage due, they may take out a second mortgage, or even a third one, for a number of reasons. They might want to make some major renovations on their home in order to boost the value. They might want to buy a vacation home with cash. They might want to take that 40th anniversary cruise in the Mediterranean Sea and spend as much money as they want. They might have a major medical expenditure come up — or they might need to send a child off to college. If the house goes into foreclosure, or if the owners put the home up for sale, the proceeds have to satisfy the first mortgage before the second mortgage holder gets paid.
Just in case you’re thinking that a second mortgage sounds like a risky investment, though, there is an important difference between funding a second mortgage behind a reverse mortgage as opposed to a traditional first mortgage. With a reverse mortgage, the homeowner (often a senior citizen) has equity in the home that could be as high as 100 percent. However, the homeowner now wants or needs some of the money back out of that house, and so they go to the bank and ask for the process to begin. The application is much less onerous than taking out a traditional mortgage is, because the asset’s value itself is the determining factor, rather than the credit profile of the borrower. The homeowner can make payments each month, quarter or year to cover some of the interest expense, but payments and loan amounts are set up so that the homeowner never owes any money to the bank unless he moves out of the house or wants to sell it. Upon the death of the homeowner, any remaining debts come out of the estate.
With a reverse mortgage, since no payments are required while the homeowner is alive, there’s no way for that loan to go into foreclosure — default is impossible. So if you are willing to fund a second or third mortgage behind a reverse mortgage, you can still charge the double digit rates that are common with second or third mortgages, particularly in the private mortgage market. However, because the homeowner isn’t having to make any payments out of pocket on that first loan, he should have more money in hand to make monthly payments to you — and so the risk will go down.
Just as with any investment, you will want to perform your due diligence before funding anything. However, it’s important to remember that because the vast majority of these borrowers are senior citizens, they are more likely to be wise with their money. They don’t want to run up credit accounts, and it’s possible to set up payment arrangements so that they are consistent with any interest payments that they are making to the reverse mortgage holder.
What goes into your due diligence? In private mortgages, the value of the asset is the most important piece of information. So you’ll want to get an accurate statement of the current equity remaining in the home. However, you’ll still want to look at the borrower’s ability to make payments and credit history. Many senior citizens have retired and may not have a monthly income, but they instead plan to pay on the basis of pension income and/or interest income from investments. You’ll want to take a look at their financial situation to make sure that they can meet this new obligation in their budget. You’ll also want to make sure that the amount they are requesting is not more than the amount that the home’s equity is worth — in fact, with reverse mortgages in Canada the equity protection is built into the 1st lenders advance parameters. The maximum allowed in a second position mortgage with a reverse mortgage is 65%. Can you really be more secure than that as a private 2nd mortgage holder? It is possible, but difficult to find.
So how do you get started? Amansad Financial has connections with a number of different home owners currently in a reverse mortgage who are looking for additional equity cash through a second or third mortgage. We can provide you with profiles of several different potential borrowers so that you find someone with whom you are compatible. If you don’t have enough to fund an entire mortgage by yourself, we can match you with other investors who are looking to go in with other lenders to fund a mortgage together. That way you’re in charge — you select the person with the type of home and equity profile that you think makes sense — and you can choose a borrower with a credit profile and income history that you think will make the best investment. We stand ready to give you some advice and perspective on what to look for in a credit profile and in an asset inventory so that you know that default is as unlikely as possible. Give one of our private lending professionals a call today — and we can get you started on the road to big profits!