What If I Need More Money To Buy And Fix The House Than I Can Get From One Private Lender?

Every time I speak I get ask...

Every time I speak I get ask...

"What if I need more money to buy and fix the house than I can get from one private lender?"

This is the #1 question I get. The answer is easy and I see light bulbs go on as soon as they hear the answer.

Look, you can NOT pool your lenders money. It is an SEC violation. What you can do is create mortgages. And you can create as many as you need to.

The lender with the bigger chunk of money gets the 1st mortgage and the 2nd chunk of money gets the 2nd mortgage.

And so on.

Now for some of you folks we need to discuss some of the terminology...

I've seen some real estate investors just zone out when we talk about:

- Mortgage

- Mortgagor and Mortgagee

- First mortgage and Second mortgage

Well let's clear up the mystery right now.

- Mortgage

When you get a loan from your private lender to purchase a house, the document that says you will repay the loan is the mortgage. A mortgage creates a legal claim (or lien) on the property until the debt is paid. Please consult your attorney if you have questions about what that legal claim involves.

The name of your private lender is on the mortgage. It is a protection for your lenders that reassures them that you are going to pay as agreed.

Once the debt is paid, there is no longer a mortgage on the property.

- Mortgagor and mortgagee

The person who borrows the money is the mortgagor. The private lender or the bank is the mortgagee.

- First mortgage and second mortgage

The first mortgage is the document that creates a lien that is in the first position. This means that in the case of a foreclosure, the money from the sale of the property will be used to pay taxes and fees, then whatever is left goes to pay the first mortgage.

The second mortgage is a lien in the second position. If after paying taxes, fees, and the first mortgage there is money left over, it goes to pay the second mortgage.

As you can see, it is much better to hold the first mortgage rather than the second.

Some private lenders have a great deal of money available to loan. My criteria for a private lender to hold a first mortgage is that they lend more than $25,000. Lenders with less than $24,000 can generally only hold a second mortgage. I do not accept loans of less that $5,000 simply because of the paperwork involved.

An example of the way this works is that one private lender will have $25,000 they want to loan so I purchase the property with their money. They hold the first mortgage. Another lender will only have $6,000 but that is just what is needed to fix the roof, repair and paint the place to get it ready to rent or sell. That second lender will hold the second mortgage.

You can have as many liens on a property as you want. Just stay under 70% LTV so your lender is secure.

See, that wasn't so hard

by: Alan Cowgill

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