Heading Off Foreclosure for Mortgage Note and Trust Deed Holders

Everybody hates foreclosure. Banks hate it because it represents a loss, an intelligence failure on their part and possession of an asset that won’t make them a cent until they move it again – and it’s not easy to move a house these days. Homeowners hate it for obvious reasons: They need to move and deal with a black mark on their credit. If you’re holding a mortgage note your position is like that bank’s, but with the added risk of having to absorb the loss with your personal assets.

How do you avoid foreclosure proceedings? Here are a few tips:

Pick the Right Borrower: This is by far the most important thing you can do if you plan on financing your own sale. You won’t have the same eligibility requirements as a bank, but helps to look them up. If the buyer wouldn’t qualify for a conventional mortgage, then you should find a truly persuasive reason to be confident that they’ll pay. Fortunately, there are plenty of people who fit in that category. For example, someone who’s been self-employed in an essential industry for over a decade is worth considering even if self-employment is a red flag to institutions. Make sure to request documents proving the buyer’s claims and run a credit check.

Carry as Little as Possible for as Briefly as Possible: This is a no-brainer, but you have to strike something of a balance here. If you’re willing to accept a smaller number of big payments you may actually increase the risk of foreclosure by making payments too big of a burden. If you lower interest or only carry a small part of the loan, you may end up making too little money for your risk and effort. Find a payment schedule that is as aggressive as possible without forcing the borrower to go into debt, and explore options like balloon payments, but do the math for yourself, to see how much you’ll make in these scenarios to ensure that they’re worthwhile.

Keep in Touch: One of the simplest ways to head off payment problems is to stay in contact with the borrower. Why not phone ahead when you have statements or other documents? This gives you a chance to informally assess how your buyer is doing and also keeps payment on his mind, reminding him that instead of a faceless bank, he’s dealing with a real person. In all cases, encourage an open channel of communication. Even though you don’t want anyone to think they can walk all over you, you don’t want to intimidate anyone to the point that they conceal information from you.

Decide Your Renegotiation Limits First: If you do your borrower a favor and adjust the loan, remember that it’s just that: a favor. You must decide on a limit to your charity before even considering this option, and stick to it. Be honest with yourself; if you’re afraid of being taken in by the borrower’s woes do everything through a qualified third party. If the borrower can’t work with your offer you had better be ready, willing and able to foreclose. You don’t want to, but unless you’re ready for this remedy, anything else you try will lack sincerity.

Sell Your Note: You can’t sell a note in poor condition, but you should still maintain precautions against foreclosure even when things look good. If that’s something you find to burdensome to stick with, sell your note. Cashing out now is better than sticking with a process you won’t like – or failing to stick with it, and risking the consequences.