I discuss some of the risk factors to consider when buying mortgage notes. Like every investment there are risk but are easily mitigated with proper due diligence. Here is a short list of some of the main risk factors to consider.
DEFAULT RISK: Borrower stops making payments which would reduce the value of the note.
MARKET RISK: Mortgage notes are affected by the changes in the interest rates. If interest rates rise, the value of the note could decrease. Additionally, if the real estate market declines the value of the property securing the note decreases which could also affect the value of the note.
CREDIT RISK: The creditworthiness of the borrower is an important consideration when buying mortgage notes. If the borrower has a poor credit history or a high debt-to-income ratio, there is a higher risk of default.
LEGAL RISK: There is always a risk of legal disputes when buying mortgage notes. For example, if there are issues with the foreclosure process, the value of the note could be negatively impacted.
LIQUIDITY RISK: Mortgage notes can be difficult to sell quickly, which could be problematic if you need to access your funds quickly.
DUE DILIGENCE RISK: It's important to conduct thorough due diligence before buying mortgage notes to ensure that you are aware of all risks and potential issues associated with the investment. Failing to do so could result in unexpected losses and unlike the other risk factors mentioned above this one can be controlled by you.
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