Formula to guesstimate the delinquent mortgage balance?

Question

Hello All!

I'm looking at purchasing a property subject to an existing Deed of Trust.(I'm bidding on the second position) The owner passed away in early 2019. There was a Notice of Sale on that DOT posted in February 2020 and subsequently canceled 6 months later. I have ran the amortization at the interest rates for when the loan was originated, and have a good idea of the balance was in early 2019, February 2020, and August 2020 when the Trustees sale was canceled. Does anyone know of a formula to calculate (Guesstimate really) the current balance assuming the mortgage is currently delinquent?  I'm not sure how delinquency compounds in amortization? Additionally, If the Trustees sale was canceled, is that reason to believe it was potentially caught up at such time? Called the Trustee to ask, and not surprisingly they were no help. I do know 100% that the second position did not pay the delinquent balance to protect their position. Either the bank just decided to cancel the sale (but why would they do that?) meaning the mortgage is now close to three years delinquent; or possibly an heir or someone caught the payments up, but didn't bother transfer title, and is now letting the second foreclose?? I'm not sure what to make of that but if anyone has a formula to calculate how delinquent payments are compounded, something I could use to get a rough estimate of what the worst case might be that would be FANTASTIC!!! Thank you so much!

Chad U. · Answer

You can run an amortization table as you noted above, and assume that payments stop being made when the borrower was deceased. But you may not know the length of the term or the interest rate from the deed of trust. However if you do you will also need to figure out what the principal and interest payment was. Multiply the P&I payment by the number of months delinquent. That will be the reinstatement amount.

In many cases the first lien holder would likely want a payoff as opposed to you assuming the loan. Therefore you will need to determine the payoff amount.  To determine that, take the approximate balance at the time of deceased and add accumulated interest. However the biggest unknown is escrow and corporate advances that may have been made by the first lien holder. These include things like taxes, insurance, preservation, legal fees Etc. So assume that taxes and insurance were paid since death, and if they had not start a foreclosure than may not be very many legal fees at that point but I would assume at least a few grand anyway. Add these all up and that will comprise the payoff amount. Corporate advances and escrow will also need to be paid as part of reinstatement as well.

Minna Reid · Answer

Please don't try this - you will get it wrong. Those payoff statements are always higher than you think. Even if you could figure out how many payments were missed, you cant possibly know how much interest was charged, or late fees, penalties, legal fees, etc... Don't even try to guess, if you value your pocketbook.

Chris Seveney · Answer

You will not be able to guess this as the first could of been paying taxes and insurance on property, may have legal expenses etc.

I have a loan with a balance of $85k but the total payoff is $185k.

You also are assuming the first was current when they passed - how do you know that?

If this is an auction the first would have been named in the lawsuit and should have responded so check to see what their response was. It may say how much they owe

Rick Pozos · Answer

You mentioned that the interest rate was a couple of points higher?? That means rates were 2.5%?? WHEN?? In the last couple of years, maybe. If the loan is more than 5 years old, rates were 4-5%. If the loan is from 2010ish rates were closer to 6%. If they had not so great credit(which may be why they had 2 loans) the rate may have been 8%+. Always over estimate by a bunch.

Also, if the loan is less than 5 years, there is probably not much equity to even want to purchase the loan.

Wayne Brooks · Answer

Force placed insurance is also about 3-4 times the normal amount. Your example of 1.09 times each monthly payment, each month is wrong….that’s 9%/mo.

Brooke T. · Answer

Thank you for your super helpful and positive answer! I have a copy of the original DOT showing a 30 year maturity but not the interest rate, and calculated it based on 4.5% which is a couple points higher than the average rate at the time the mortgage was originated.

Does accumulated interest accrue at the same rate as the note bears and would it, once delinquent, calculate somewhat like negative amortization from that point (except $0 being paid) plus the escrows and fees also bearing interest at the same rate? Am I understanding that correctly?

In reading through some judicial foreclosure court cases, I've been able to see how the foreclosing plaintiffs are calculating the balances on their delinquent promissory notes, these are not subject to all of the same regulations, but it seems similar to what you summarized above. These were all fully amortized notes, no ARM or balloon payments. 1st month Delinquent balance x1.09 plus the next month payment then total balance delinquent x 1.09 and so on. It became very expensive QUICKLY!

Formula to guesstimate the delinquent mortgage balance?

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