What's the best way for me to set up a private second mortgage?

I own a house that is rented and the renters would like to buy it. My price is $165k, but the lender will only give them a $139k mortgage, because they have credit blemishes. I'd like to offer a $26k second mortgage to them. (Or maybe a bit higher to cover expenses related to making the second mortgage). I was thinking 15 or 20 year amortization, 7% or 8% interest, with a 5 year balloon. Does this sound reasonable? And what happens if they don't find a way to pay me off in 5 years? Do I get stuck with nothing except a second position, and therefore no money until the house is sold? How can I protect myself? And if they stop paying one month after we sign the paperwork what can I do? Anything?


Thanks much for any help!!What's the best way for me to set up a private second mortgage?
That is a great way to sell the properety and you are protected by the second trust deed on the property. It is not as difficult as most will have you believe.





A title company will record your deed along with the first trust deed at closing. Make sure there is a penalty for late payments also make sure there is a date that they must pay before. The amortization is up to you as well as the due date.





You need to find out if the lender will allow a 2nd mortgage on the properety even though you are willing to do one, some mortgage lenders want the buyer to come in with some type of down payment or clsoing cost. Find this out from he lender or broker that got the first mortgage for them.





If this is allowed, good then go ahead and record your 2nd deed. You might want to tell the closing agent that you want to be notified in the event that the buyers fail to make a pyment to the first mortgage. If they fail to make a payment you should make the payment to protect your position as the 2nd. Even if they fail to pay the first and keep paying you you can still foreclose on them. This is the reason for the notification.





In the event you are required to foreclose on the property for any reason to include them not paying the first or paying you, find a professional company to do the foreclosure for you. There are so many little laws and stuff that must be done, they will do it for you. Whatever their fee for the foreclosure you can add to the mortgage that they still owe you so it will be free service to you. Don't be afraid, because they are set up to do this type thing and will protect your rights and you will get the house back in time. You may then re-sell the property again for the current appraised value.





While in foreclosure you will be required to keep the 1st mortgage current, in the event the property does not sell at the foreclosure sale. Or let them know that you as the 2nd has placed the house in foreclosure and they will be paid upon sell of the property. If you fail to make any payments to the first mortgage and the house fail to sell you would have to make a lump sum payment to them.





I hope this has been of some use to you, good luck.





';FIGHT ON';What's the best way for me to set up a private second mortgage?
You really need to discuss this with a lawyer that specializes in real estate matters. There are many ways to do this wrong.
A title company can draw up the second deed and record it for you. If they fail to pay then you have the right to foreclose just as any bank does. If you were forced to foreclose then you would have to pay off the first deed so that you could resell the home. This can be done by you obtaing a new mortgage on the property with in 30 days. The biggest problem comes in if they do not pay the first deed of trust and they short sell the property for the amount owed! You could be out in the cold as they will file a bk on you.


It can work!


Just some pitfalls to consider!
Sorry, I don't know where you are and the answer depends on the laws in your country/state, but some general advice that is correct for Australian laws:





First, send them to a mortgage broker accredited with all lenders. You may find they can get a non-conforming loan at a slightly higher rate and save yourself the trouble.





Second, don't rely on balloons or interest rates. Calculate what you would expect to be paid for the remainder in one or two years time including interest rates and inflation. Then make an agreement with them that they will re-finance to borrow the remainder and pay you out in one or two years time. (Reasoning is that one or two years should be sufficient to realise a rise in value creating equity on which to draw coupled with a solid period of steady credit history which is sufficient to make the banks review their lending capacity criteria in relation to the borrower) Also make a backup plan with penalties should this fail (so the borrower is legally taking the risk)





Third, go to a lawyer and have a legal contract drawn up.





But, unless you really know and trust these people and are therefore doing it as a favour, don't do it. I am sure you can find someone else to buy your house. You can't get money out of people who don't have it.
Why not set up the entire sale price of $165K under lease option. Set it up to where a small portion goes towards their downpayment but have enough in the payment to cover your current mortgage plus some cash flow. I'd set it up on a five year plan to where they must arrange financing at the end of the term. On lease option(in my state) if ONE payment is missed they forfeit ALL moneys including the up-front downpayment. I wouldn't risk your first idea unless I had an iron clad contract that reverts the house BACK to you if they default. Good luck.....