One of the biggest questions we get most often is: how do I protect myself when investing in private mortgages? Putting your money into a mortgage, and then hoping that someone will pay it back – with interest – can seem like a frightening prospect. But when people have this question, there’s one thing we tell them time and time again. Investing in private mortgages is extremely safe, if you know the three C’s of protecting yourself when investing in them.
Collateral is of course, something of value that the borrower is going to put up in case they default on the loan. When you’re dealing in private mortgages, this collateral comes in the form of equity paid for the home, and that comes in the form of a down payment supplied by the borrower. With conventional mortgages this needs to be at least 20 per cent of the home’s value, but when you’re talking about private mortgages, you can ask for as much as 35 per cent and still be considered a “standard” private mortgage.
You want to ensure that a cash flow is there – both for the borrower so that they can continue to repay the mortgage, and for you because after all, that is the entire point. This will largely be taken care during the underwriting process, which will most likely be done by a mortgage broker instead of yourself. By making sure that the money is only being given to qualified borrowers who will be able to pay it back in the time frame specified, you’ll ensure there’s always good cash flow, which is essential in protecting yourself while investing in private mortgages.
The character of the person borrowing the money might mean more than you think it does, but again this is something for your mortgage broker to worry about, not you. Simply put, there’s a reason that people get dressed in their best suits before they go to the bank to apply for a loan, and it’s because they want to put forth their best foot, and give off the best impression. The same should be true about applying for a private mortgage and if your mortgage broker doesn’t feel good about their character in general, they shouldn’t agree to work with them. And a good mortgage broker won’t.
Protecting yourself when it comes to investing in private mortgages can seem like a very difficult thing to do. However, one of the biggest benefits that comes with these investments is that they are one of the safest kinds you could make; and that’s largely because it’s so very easy to protect yourself while investing in them.