Mortgage Industry Classifications and Repayment Structures

As a Discount Note Broker or Investor, you will typically only be involved in private mortgage notes.  It is of some “professional” importance, however, that you have at least a minimal understanding of the types of mortgages found in the “traditional” side of the industry

Categories of Mortgage Loans

There are four basic categories of mortgage:

  • FHA (FEDERAL HOUSING ADMINISTRATION):  The FHA was created in 1934 and is a division of HUD (Housing and Urban Development).  FHA does not actually provide the loan but simply acts as an insurance provider.
  • VA (VETERANS ADMINISTRATION);  VA loans are issued by qualified lenders and are guaranteed by the U.S. Department of Veterans Affairs.  They are available to veterans and their surviving spouses and are characterized by no down payment (100% financing), low interest rates, and their ability be assumed.
  • CONVENTIONAL LOANS:  Conventional loans are the most common category of loans and are those loans which do not include some form of government guarantee.  ALL OWNER FINANCED LOANS ARE CONSIDERED CONVENTIONAL!
  •  USDA (US DEPARTMENT OF AGRICULTURE):  USDA loans are guaranteed by the U.S. Department of Agriculture and focus on providing loans on what are considered rural properties.  Like VA loans, they feature low interest rates and 100% financing.

Standard Loan Repayment Structures

Most private owner financed mortgage paper will be of the fixed rate amortized variety (fully or partially amortized).  There are several other common types of loan repayment structures.

  • FIXED RATE AMORTIZED:  These loans feature a “blended” payment that is the same every month (although the amount of principal and interest varies).  They feature a non-changing rate of interest and may be “fully amortized” or “partially amortized” (loans featuring a balloon payment)
  • ADJUSTABLE RATE MORTGAGES (ARMS):  The interest rate is not fixed but periodically resets.  The total interest rate charged is made up of two components, an index rate (prime or LIBOR) and a margin rate (represents the lenders profit on the loan)
  • TERM MORTGAGE:  Known as a “straight loan”, payments are made up of interest only (non-amortized).  The principal of the loan balloons at 100% when the term ends.
  • PARTICIPATION MORTGAGE:  Participation mortgages are those where the lender participates (gets a cut) of the properties appreciation or income over time.  There are three types; income participation (shares in rents),  shared participation (shares in appreciation over a set time such as five years), and equity participation (shares in the appreciation of the property over the entire life of the mortgage)
  • WRAPAROUND:  Incorporates an existing loan with a new loan with “piggyback” characteristics.  The borrower makes one payment to the junior lender who forwards the payment to the senior lender.

Opportunities in the Private Mortgage Note Industry

There are many opportunities for savvy entrepreneurs in the private mortgage note industry including but not limited to:

Buying Notes for Investment

  • This is traditionally why most enter the industry
  • Real Estate is a traditionally “sound” investment
  • Yields on private mortgage note paper is typically much greater than bank CDs
  • You can readily exit your investment by selling to another investor prior to maturity
  • Often provides an opportunity to purchase property at a bargain price through foreclosure

Originating Owner Financed Paper

  • Owner financing used to help exit rehab projects, fix and flip, short sales, etc.
  • Offer a medium for “parking” funds at high yields for various periods of time
  • Can provide seniors with high yield retirement income
  • Appeals to a broad range of “non-bankable” buyers
  • Provides an opportunity to sell property at “top dollar” prices

Brokering / Consulting Opportunities

  • Opportunity to operate as a “finder” for institutional note buyers and earn a fee (commission)
  • Provides a professional “expert” consulting opportunity
  • Requires little or no investment capital with modest marketing costs
  • Usually operated as an inexpensive home-based business
  • Excellent supplemental business opportunity
  • Perfect home-based opportunity for today’s mobile creatives

Additional Opportunities

It is also important to note that mortgage note investing and brokering is very often just the beginning to a lucrative career and opportunities in the many other areas of real estate investing and services such as real estate:

  • wholesaling
  • rehabbing
  • short sales
  • foreclosure investing
  • property management
  •  cash flow brokering and investing
  • commercial finance and the brokering of factoring transactions
  • much more