Common Questions About Selling Mortgage Notes

Tara Mastroeni
Published: June 11, 2016 | Updated: October 29, 2023

For some property sellers and buyers, a mortgage is an obstacle to full property ownership instead of a vehicle that makes full ownership possible. Sometimes, this is because they enter a seller-financed mortgage without understanding all it entails, and have misconceptions about parts of the process.

Here are some frequently asked questions that we’ve answered to reduce the learning curve for seller financing by providing sellers and buyers with essential information on seller financing and mortgage note sales. Whether this is your first time considering seller financing, or you simply need a refresher course on the subject, the information below will educate you about the financing process, the process of a mortgage note sale, and dispel common misconceptions you may have about either one.

Key takeaways

  1. A seller financed mortgage is a transaction in which a property seller finances the buyer’s purchase of the property by providing the latter with a loan agreement.
  2. A mortgage note sale can benefit by the holder by giving them a lump sum of cash, removing the hassle of administering a loan, and removing the risk of non-payment.
  3. To get the most value for your mortgage note, make sure payments are made on time, the property is well-kept, and the initial terms — like interest rate and down payment — are favorable to the note holder.

What is a mortgage note?

A mortgage note is a promissory note secured by a specified mortgage loan. It’s a written agreement between the property seller and property buyer that requires the buyer to pay the seller a specific sum of money over certain period of time, including interest.

A mortgage note is similar to a traditional mortgage in that it requires the property buyer to pay the seller regular payments in order to occupy the real estate. The seller serves as the lender and the buyer is the loan recipient. The seller owns the property after repaying the loan.

What is a seller financed mortgage?

antique-houseA seller financed mortgage is a transaction in which a property seller finances the buyer’s purchase of the property by providing the latter with a loan agreement. Instead of receiving a loan from a traditional lender, the buyer arranges financing with the seller.

After the terms of the sale are established and the contract is active, the seller receives monthly payments on the mortgage note for the duration of the contract. Alternatively, the seller can arrange a mortgage note sale to liquidate the note to a mortgage investor for a lump sum payment.

How does seller financing benefit buyers?

A seller financed mortgage benefits property buyers in three primary ways. First, the buyer can qualify for financing despite have less than great credit. Second, the buyer can receive the loan in a short period of time compared to going through the loan process of a traditional lender. Third, the down payment on the property can be more flexible because the owner sets the requirements.

How does seller financing benefit sellers?

A seller-financed mortgage also has three primary benefits for property sellers. First, it makes it easier to find property buyers by setting attractive loan terms. Second, sellers have a greater chance of receiving their asking price, as the buyer is likely to have a credit history that makes obtaining third party lending improbable. Third, the seller can sell the mortgage for a lump sum.

What are the benefits of a mortgage note sale?

A mortgage note sale can benefit sellers in several ways. For most sellers, the greatest benefits are: receiving a lump sum payment that can be used for anything, avoiding buyer default on the financing agreement, and eliminating hassles associated with collecting late payments, foreclosing on the property due to non-payment, and altering financial plans due to loan default.

What determines the value of a mortgage note?

The value of a mortgage note is largely based on the terms of the financing agreement and how well the buyer meets the requirements. In a mortgage note sale, a loan that has a higher down payment is more valuable than a loan with a smaller down payment, a loan that has a history of on-time payments is worth more than a loan with a sketchy payment history, and a loan that has a higher interest rate is more valuable than a loan that has a lower interest rate.

Additional factors that can impact the value of a mortgage note include: conditions in the current real estate market, the type of properties for which a mortgage investor prefers to buy mortgage notes, and how quickly the seller financed loan is scheduled to be paid in full.

How can the value of a mortgage note be maintained?

A mortgage note holder can do several things to maintain the value of the note. Of great importance are to ensure that the loan has a history of punctual payments, the buyer fulfills duties to maintain the property and not commit waste, and loan contract terms that reasonably predict that the buyer will be able to pay off the loan within the required period of time.

The value of a mortgage note can also be maintained by selling to the buyer that has the highest credit score, setting a loan interest rate that is higher than the industry standard, and requiring a down payment that covers a significant percentage of the sale price upfront.

What are the benefits of a partial mortgage note sale?

For most property sellers, a partial mortgage sale has three main benefits: It allows the seller to receive a lump sum payment and receive monthly payments on the remaining balance that wasn’t sold; it results in the sold portion of the balance being acquired for a smaller discount than the discount that applies to a full mortgage note sale; and it allows the seller to share with the buyer the financial risks associated with owning the note.

What are the benefits of a full mortgage note sale?

For the majority of property sellers, a full mortgage note sale has four major benefits: It provides a larger lump sum payment than the payment for a partial mortgage note sale; it frees the seller of financial risks associated with the loan; it instantly provides the seller with a large sum of money that would often take years to collect through monthly loan payments; and it allows the seller to keep money from the sale no matter how the mortgage note performs after it’s liquidated.

What risks are associated with mortgage notes?

forestThe risks associated with mortgage notes are similar to risks that come with traditional mortgages. The greatest risk is that buyer will default on the contract, which leads to a second, corollary risk. If the buyer has a poor credit rating, this indicates that the loan may not be repaid on schedule. In turn, the prospect of a loan default presents the greatest risk: The seller may have to go without receiving income from the property until another buyer is found.

The good news is that all risks associated with a mortgage note can be eliminated through a full mortgage note sale. After the sale is complete, the mortgage investor assumes full responsibility for the risks, allowing you to have peace of mind with your payment.

What is the process for selling a mortgage note?

The process for selling real estate notes depends on the requirements of the investor that buys the note. At Amerinote Xchange, our process for executing a mortgage note sale has 12 steps, most of which we handle on your behalf. After you perform steps one, two and three — soliciting an offer, accepting the offer, and providing copy of the note and deed, land contract, or mortgage — the remaining steps are as follows:

  1. Verify asset / collateral
  2. Receive documents for underwriting
  3. Review and sign purchase agreement and seller checklist
  4. Receive a BPO (broker price opinion) or appraisal
  5. Review the BPO or appraisal
  6. Perform a property title search
  7. Approve the property title
  8. Schedule the closing date
  9. Provide payment for the sale

Becoming familiar with the structure of the sale will help you communicate with us throughout the sale process, understand how the steps impact each other, and allow you to track progress toward the close of the sale and receiving payment.

Selling Your Mortgage Note to Amerinote Xchange  

There are several reasons why a mortgage note sale can be more financially beneficial than retaining a mortgage note: You receive a sizable, lump sum payment to use for other financial needs; you can avoid the potential devaluation of the note; and the hassle of managing the loan is eliminated. In addition, when you opt for a partial note sale, you receive both a lump sum payment and ongoing monthly payments on the portion of the loan that isn’t sold from the note buyers.

If these benefits sound appealing to you, it may be worth learning about our competitive offers and attractive pricing from industry insiders with unparalleled expertise in the seller financing industry.

For help deciding whether selling real estate notes would benefit your financial plans, please call us today at (800) 698-3650, or use our contact form. We look forward to hearing from you.