Once you decided to offer seller financing on your property, you became obligated to invest time and take steps in mortgage note protection. Mortgage note protection is primarily procedural in nature and not difficult. Basically this means it involves your investing time and paperwork to administrate. However not everyone has the desire, discipline or ability to this well. Regardless, since you are the note holder, the mortgage note (consisting of a promissory note and property mortgage) is a financial instrument that has significant value that you need to manage and protect.
Mortgage Note Protection Steps
Safeguard Original Documents
Promissory notes are negotiable, transferable documents. Safeguarding this document 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 safe, fireproof box or in a safe deposit box at your bank. Be sure to keep copies of the originals at home for your records.
After being recorded at the county recorder’s office, the original property mortgage or deed of trust will be returned to you. It is a good idea to keep this original document with the original promissory note.
Record Payment History
Maintaining an accurate history of when you receive each of the monthly payments is essential. It will help prevent any misunderstandings between you and the borrower. It may also help the borrower refinance the mortgage if you have included a balloon payment. An accurate payment history will help you receive the highest cash price for your mortgage note should you ever decide to sell it.
Along with updating your payment record each month, 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 to help provide proof that you are entitled to receive the late payment penalty called for in your mortgage.
Making sure the property taxes are paid is an important step that you should take to protect your investment. This will be easy if you are collecting escrow for the taxes. One thing you should do is to make sure that 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 parcel 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 the tax status. If the tax payments are overdue, contact the borrower right away to demand they are paid in full immediately.
Having an adequate amount of homeowner’s insurance is essential for protecting your investment. Always make sure that you are listed as Lender or Mortgagee on the insurance policy and that the policy is written for at least the balance of the mortgage note. From that point on, watch for the renewal notice that will be mailed to you each year. If the 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 interest 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 borrower and add the cost of the policy to the balance of the note.
It is the Borrower’s duty to protect the value of the property he/she is buying until it is paid in full. This is important because the value of the property is what keeps the Borrower making payments. If the Borrower 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 borrower’s primary 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 amortization schedule of the mortgage.
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 Borrower 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 Borrower 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.
If the Borrower fails to perform any significant part of the mortgage, the mortgage note holder may have the right, after notifying the Borrower in writing of the exact nature of the default, to declare the remaining balance due and payable. Then, if the default is not the cleared up or the mortgage note is not paid in full, the mortgage holder can begin steps to regain possession of the property. Improvements made to the property by the Borrowerr then become the mortgage holder’s property. Defaults by the Borrower 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.
In conclusion, keep records of all written and spoken conversations with the Borrower, 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. If you need to involve an attorney, which 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.
Please call us at (888) 213-3383 to help establish the market value of your mortgage note or Contact Us via Email.