All Forum Posts by: Dion DePaoli

GLS...?? Lamb to the slaughter house, IMO. Not an ideal place to find your first trade.

Matt, remember the whole loan market is not normalized so the data that is shared and the flow of a trade is not the same for all sellers. Transaction structures that seem like a fire drill or do not allow for proper exclusive due diligence are not good places for a newbie to start.

Lots of my friends work in this industry and I trade with them, however a trade is a trade, sort of like a one on one basketball match, we both play to win. Do lots of research like you are doing and be careful. Questions are free here on BP and you have three guys here willing to give some good guidance. Take your time and remember you are the only one who will care the most about your assets and capital, protect them at all times.

Matt Liu, borrowing money to use as a down payment with a requirement to pay it back may prevent the senior financing from qualifying you. The lender will source and season the funds you use as down payment and for closing costs. You and your family member who provided the loan will be asked to sign an affidavit that the money is not required to be paid back and is a gift. Lying about the loan and saying it is a gift, when it is not, is fraud.

In the same case, you would not be able to secure the loan from the family member by the real property as the senior lender will look to ensure a second position does not encumber the property. If you record a loan or lien after the purchase, the senior lender may call your loan due for violation of the loan terms.

If this is an investment property, gift money is not allowed in conventional loans. If you need $25k for the down payment, do you also need 6 months reserves to qualify?

If this is to be a loan, then the first position loan amount plus the $25k loan amount will be added to create your CLTV (Combined Loan To Value). In that case, the family member loan can't be used to cover closing costs, only the purchase price. You would have to make the up difference in the down payment for the CLTV restrictions and the closing costs.

I hate to be the black cloud, but I am not sure you fully understand your financing situation well. You might want to square that away before you run down a road that doesn't exist.

One other concept, the income in a loan is the interest, not the principal so the balance of a loan is not taxed. The interest received is the investors income which is subject to tax.

You don't give the mortgagee anything, the mortgagee (through their servicer) will issue you a 1099-INT. (Mortgagee = Lender/family member)

Your family member can form a company here, I would say an LLC is more appropriate than a C-corp if they wish but they do not have to do that. The mortgage servicer will remit investor distributions from your payments to what ever entity they choose, which can simply be a private bank account held personally.

Your relative should seek accounting advice from a UK professional on how to structure that interest income best for the taxation that may come from the US income and the UK income.

Steven M., safe act applies to notes originated after the date of the regulation, which is around March 2010. You are not originating anything, you are buying a loan that is already made. Safe act in your role will affect the enforceability of the security instrument and note. Not really sure how yet, as the body of law around the regulation is not very filled out, but you don't want to be on the wrong side of that stick. You can look up the national and state safe act for more clarity. The more than 4-5 rule you refer to is not universal for all states, many states are zero. An issue for the originator and an issue for a buyer who does not check to see the state rule prior to trying to enforce remedies.

Where could there be fraud, in any loan, private or institutional, well damn near everywhere. Not too complicated to think through the bigger holes though. Did the seller own the property prior to the loan? Was title clear prior to the loan? Was the real property value inflated? Does the borrower concur with the accounting of the loan? Are the terms written in the note being enforced? Is there any usury or predatory practices? The difference between the two (private and not) is institutional loans have a typical system or origination and servicing, private does not.

Let me say, I think for the most part, fraud is a minority in the market place. Just like plane crashes, we hear about the problems but forget about all the ones with no problems. Even in the institutional side of loans, depending on the sophistication of the investor holding the loan, things can be done incorrectly, like servicing and accounting, etc. Not a function of fraud as much a function of ignorance or misconception. Those are probably the bigger issues. We refer to it as a defect.

In some cases, a bigger issue for a new investor is getting picked off by a more sophisticated investor. For instance in this thread, Bill and I understand the risk of SAFE Act better than you, we might be selling a note off since we question the enforceability and you incorrectly assert there is some grace amount of loans. We sell you the note, you find that you can't enforce it and we didn't give you any recourse.

I always like to say, there is no magic in mortgages. I always like to say they are complicated instruments, they involve many moving pieces and a variety of implied laws and regulations. In most cases, you will find the folks with more experience have that experienced from being burned on things they learned the hard way. But man, they are fun!

Foreign currency will simply have to be converted coming in and going back. There is a "Portfolio Tax Exemption" that if structured properly will apply to the foreign investor. We operated a fund using this exemption for foreign investors which invested in mortgages. There are attorney's who specialize in this. It may not be a huge benefit and cost prohibitive on a $80k loan but worth a look, nonetheless.

As I hit post, I see you wrote the word 'interest payments' and I guess I just ran off doing taxes and insurance escrows.

Taxes and insurance are not the same as interest and principal.

If you get a loan, you will likely amortize the loan, unless you get an interest only period. So, you can simply download a simple excel amortization table, plug the loan terms in and it will show the accounting for each period.

In a fixed rate loan, you will have the same payment amount for each period. Each payment will allocate an increasing amount of principal and decreasing amount of interest. In the note, it should state how payments are applied. Usually it is fees, interest and principal in that order. Your ongoing principal balance will simply be the previous period's principal balance less the amount of principal allocated from the current period's payment.

If I understand this properly, you are buying a property that a family relative will finance via a 1st position Deed of Trust. Within the scope of the financing you want to escrow your tax and insurance payments.

Calculate your escrows:

[Annual Property Taxes Due] + [Annual Home Owner Insurance Premium] = Total Escrow

**if there is HOA fees, you would add it to the above to and break it out like below, I am omitting it though.

[Total Escrow] / 12 = Monthly Escrow Payment

When you close with the financing, the closing agent will help you prorate your taxes. Usually institutional lenders will collect 2 or 3 months of insurance payments at closing, which gives them a buffer to pay the bill when it comes due. The taxes function the same way but since each county is different in terms of payment due dates, you will calculate how many payments need to be collected at closing to have enough money in the account to pay the bill when due. Keep in mind some counties offer a discount to pay earlier, so you might want to use that as the target date.

Example:

Insurance = $1,000
Taxes = $2,000
Closing Date = May 15
Tax Due Date = Nov

Total Escrow = $3,000
Escrow Payment = $250

Escrow Insurance at Closing (3 months @ 83.33) = $249.99
Escrow Taxes at Closing (9 months @ $166.67) = $1,500.03

You will receive a closing credit (6 months) for prorated taxes from the Seller (unless otherwise negotiated) which accounts for the portion of the payments during the ownership of the seller. As you pay into the escrow you will have a 3 month buffer, so in September the total taxes due should be in your escrow account, which you will pay in November.

It is a good idea for your relative to look into a mortgage servicer. Escrow accounting is pretty regulated and can be administratively intense. The cost of servicing can be as low as $30 to $45 per month. This insures everything is done properly and all your relative will have to do is collect the distribution from the servicer.

The maximum allowed buffer for an escrow is 1/3 of the total amount needed to pay the sum of all the bills. You don't have to buffer it with 3 months but I would not recommend using zero either. You want padding for when policies change in price or taxes go up. Each year a proper servicer will do an escrow analysis, usually on your loan anniversary and give back any overage or increase the payment do to catch up with rising costs.

Narrow your purchase criteria down as you learn. Feel free to ask more questions on BP. Happy to point you in the right direction when the criteria is a bit more resolved.

By investor, I mean the investor who purchased the paper. Yes, full files were stipulated but in many cases file due diligence was post trade and was done poorly. In new origination, back in the day, there was not a ton of due diligence, it was more like a facet being turned on and off. Loans were pooled, priced and sold and then files were shipped with buyback provision for missing items.

The title company would be needed to fund the loan. Not sure why anyone would create the instrument for no gain.

Yes, there is no other solution since you will not be able to get a satisfaction from the mortgagee. Our actions were around $2,500 each. It sucks but there is no other legal way to clear the cloud, that I know of. I tried to see if I could find a POA for the Mortgagee but I couldn't find anything in my couple of mins of looking. The correspondent lenders didn't need to keep trustees around since they didn't/don't actually own anything.