Hello Everyone, I am new to money lending (I have funded one mortgage so far) and I am trying to decide if I should proceed with a first mortgage opportunity.
The property was appraised at $150,000 but the appraiser makes a strong note of caution that it could be worth $132,000 and be hard to sell. I've seen the property and checked out all the comps and think it would likely sell for $130,000 +-5k. Property values in the area are flat (It's a town an hour east of Ottawa Ontario, an hour west of Montreal of around 10,000 people and there is no growth happening) so there is no real chance of appreciation on the property.
The borrowers needs $120,000- the money is going to payout of property tax, the current first mortgage and replace the roof.
There is a second mortgage already on the property at $28,000 and although it is not been confirmed yet I think there will be a furnace lien on the house as well. Likely $5000-$8000. Their off title debt is ~5k is credit cards and 10k car loan.
So the borrowers will have negative equity in the house. What are peoples thoughts on lending on a house that will have negative equity?
The borrowers have the capacity to service the debt. The seem to have the willingness. GDS is 31% and TDS is 41%. The gentleman is 64 and it is his childhood home that was purchased from his parents 10 years ago. His wife is younger- 50. I think they would be better off selling and told them this but due to the strong emotional attachment they want to keep the house.
The story is he got sick 3 years ago and they've got behind and have not been able to catch up since. Have they poor credit but have never missed a mortgage payment. (Bad credit is phone bills to collection and visa often late).
The exit strategy is repay the property tax and put on mortgage on an 15 year amort so it will have at roughly 75% LTV in 2 years and refinance with a MIC.
My concerns are as followings:
If they do not pay I will either lose roughly $20,000 assuming an exit price of $130k or own a property (it's a duplex) that would have roughly IRR of 8% on a 3 year hold in a town that I do want want to own a rental in.
The borrowers have enough money to pay as things are now. If there is a job lose, illness, major repair needed on the house they would be in trouble and so would I. Adding to the risk they would need to hold things together for 2 years.
The only reason I am reluctant to pass up the deal is that it is a 14% first mortgage with payments of $1650/ month. So I would be getting back 20k in the first year. The principle will have reduced $3,000.
Has anyone out there invested in these types of mortgages? And if so, I would love to hear your thoughts on this or anything I should to doing to mitigate my risk.
Thank so very much for any help.
Chris
