Protect Your Mortgage Investments
You've sold your property and now own a privately held mortgage. Each month you will receive a payment of both principal and interest from the Purchaser. This payment stream is an excellent source of income. Especially for people who don't feel comfortable investing in the stock market, but want to earn a better rate of interest than banks are paying. However, just like any other investment, it is important to know how to protect the value of your mortgage.
Unlike many investments, the mortgage created when you sell a piece of property is backed by very specific collateral. Protecting this collateral is imperative to maintaining the quality and health of your investment. As a mortgage holder, the ability to protect your collateral is built into the mortgage document. Once you begin collecting payments it becomes your responsibility to monitor and enforce these provisions. In the remainder of this section we present some important steps you can take to help protect your investment.
Keep Your Original Documents Safe. — Mortgage notes are negotiable, transferable documents. Safeguarding these documents is extremely important. Many times the attorney that handled the property closing for you will keep these documents in their files and provide you with a copy. This can be satisfactory if you are going to maintain an ongoing relationship with that attorney. If not, or if you prefer to keep them yourself, store them in a fireproof box or in a safe deposit box at your bank. Be sure to keep copies of the originals at home for your records.
Keep a Payment History. — Maintaining an accurate record of when you receive each of the monthly payments is essential. It will help prevent any misunderstandings between you and the Mortgagor. It may help the Mortgagor refinance the mortgage if you have included a balloon payment. Most importantly for you, taking this step will help you receive the highest cash price for your mortgage should you ever decide to sell it.
Along with maintaining a payment record, you should always deposit the payment into your bank account. This will provide you with a verifiable record of when you received each payment. Another suggestion would be to keep a copy of each check or deposit slip in a file with your payment record. Finally, in the event that you receive a payment after the grace period has expired keep the envelope the payment was mailed in. This will help provide proof that the payment was received after the grace period had expired and that you are entitled to receive the late payment penalty your mortgage calls for.
Property Taxes. — Making sure the property taxes are paid on time is another important step you should take to protect your investment. If you are collecting escrow for taxes and insurance this will be easy for you. One step you should take is to make sure the tax bills are sent to you directly from the tax collector. From that point on, you only need to make adjustments in the escrow payment for increases or decreases in the amount of the tax or insurance.
If you are not collecting escrow it is important that you verify the taxes have been paid. In order to do this you will need the tax map number, the phone number for each of the tax collectors and the date that each of the tax bills is due. With this information, you can call the tax collectors directly each year to verify that the taxes have been paid.
Homeowner's Insurance. — Having an adequate amount of homeowner's insurance is essential for protecting your investment. Always make sure that you are listed as Mortgagee on the insurance policy and that the policy is written for at least the balance of the mortgage. From that point on, be sure to know when the policy renews and watch for the renewal notice that will be mailed to you each year. If a renewal notice does not arrive prior to the expiration of the current policy, call the insurance agent to check on its status.
If the insurance policy on the property does lapse, you can still protect your investment by either purchasing a new policy, or adding this property to your existing homeowner's policy. After protecting your investment, you will have the right to demand payment from the Mortgagor and to add the cost of the policy to the balance of the mortgage.
Purchaser's Duties to Maintain Premises. — It is the Purchaser's duty to protect the value of the property he or she is buying until it is paid in full. This clause is important because the value of the property is what keeps the Purchaser making payments. If the Purchaser ever defaults and suffers foreclosure, it is the value of the property that should enable the mortgage holder to re-sell without suffering a loss. It would be a good idea to drive by the property you sold on an annual basis at minimum. If you have moved out of the area, have someone you know do this for you. Fundamental changes to or deferred maintenance on the buildings on a property can seriously diminish the value of your investment.
Income Tax Reporting. — If the property you sold is a home being used as the Purchaser's residence you must report to them the amount of mortgage interest they paid you during the year. The IRS requires that you provide them with this information by January 31 of the following year. You can generally determine how much of the payments you collected during the year was interest from the mortgage’s amortization schedule.
If Payments Are Late. — If a payment is ever late, we recommend taking the following steps: (1) Check the mortgage note to see if a "grace" period exists; if so, you must honor it. (2) If no grace period exists or if it has expired, phone the Purchaser and ask about the payment; insist upon payment; make a note of the date and time of the call and keep this information with your mortgage. (3) On the same day as the above phone call, write a letter that identifies the default and summarizes any action the Purchaser has promised to perform and mail it, certified mail, return receipt requested. (4) If the above steps do not produce the desired results contact an attorney. If mismanaged, trying to cure a default by yourself can cause problems.
A failure to enforce any clause in your mortgage can, over time, establish the precedent that the clause is not binding and has no effect. In other words, actions speak louder than words. Consistent conduct over a period of time, in fact, can take precedent over the actual wording on your mortgage in a court of law! In short, stick to the language in the mortgage or be prepared to find it difficult to enforce in court. Declaring a mortgage to be in default and starting the foreclosure process is a serious matter and should be handled by an attorney familiar with the laws of the state in which the property is located. The biggest mistake made by mortgage holders in this area is (1) trying to take matters into their own hands, and (2) delaying the exercise of their rights. Begin to think in terms of foreclosure when the Purchaser is one month behind, not three or four months.
Default. — If the Purchaser fails to perform any significant part of the mortgage, the mortgage holder may have the right, after notifying the Purchaser in writing of the exact nature of the default, to declare the remaining balance due and payable. Then, if the default is not cleared up or the mortgage is not paid in full, the mortgage holder can begin steps to regain possession of the property. Improvements made to the property by the Purchaser then become the mortgage holder’s property. Defaults by the Purchaser may include failure to make timely payments, failure to properly maintain the property, failure to adequately insure the property, or failure to pay taxes on the property as they become due.
Remember, you are not the "bad guy"... the Purchaser is the one not making payments. He or she can sell the property, refinance the property, or bring payments current. The ball is in his or her court, so to speak. Advise the Purchaser of the available options and of the fact that you are prepared to bring legal action. After an initial phone call and a certified letter, only swift and decisive action taken with the assistance of legal counsel is likely to cause the Purchaser to act. Be honest, firm and considerate. Don't harass and don't delay!
Keep records of all written and spoken conversations with the Purchaser, including dates, times, and what was discussed. You will never know how or when these records will come in handy until you need them, but don't have them. Then it's too late! Also, because your attorney will be required to appear in court, it is best to hire one who lives near the property in question. This will save you from paying travel time and other unnecessary expenses.