Holding a Note on Real Estate

Tara Mastroeni
Published: October 20, 2019 | Updated: December 10, 2021

Holding a Note on Real Estate


A mortgage note is an instrument contains all the necessary information and terms that property buyers and sellers need to keep track of when it comes to the repayment schedule of a mortgage loan. Essentially, it is a written agreement to pay back the debt. In the contract, it dictates the loan terms, payment schedule, interest rate, amortization period, and any other important details the two parties agreed upon. The seller then holds the note until the buyer pays it off in full.


Holding a note on real estate can provide a consistent stream of income for the seller. However, it also comes with risks. For example, if the buyer falls behind on payments, the seller may be out of a large amount of money. As a seller, you have worked hard to pay off your home, and it is important to protect that investment. If you are interested in holding the note on your property, you want to be aware of all the positives and negatives associated with doing so.

Why Are Mortgage Notes Important?


A mortgage note acts as a written promise to repay a debt on a real estate purchase. It states that the person who purchased the property will pay the seller back a certain amount over a designated period of time. One thing to keep in mind is that the note will often not be the full price of the real estate. This is because the buyer’s downpayment is subtracted from the overall price prior to the note being written.


A mortgage note will also state the agreed-upon date that each payment is due, whether it’s at the beginning, middle, or end of the month. It will also outline the penalties for missed payments, such as late fees and the seller’s right to foreclose on the property to recover lost income if necessary.


When holding a note, the seller has the option to collect these payments until the property is paid off or they can sell to note buyers for a lump sum.


What Holding a Mortgage Note Means


You have worked very hard to pay off your property. So when the time comes to sell, you want to ensure you are protecting your investment and are not left financially in the hole. By acting as the “bank” for the buyer, you can benefit from the income whether you’re downsizing, upgrading, or moving to a completely new area.

Offering to hold the note is a great way to have a diverse amount of investments and streams of income. However, precautions should be taken at the very beginning to ensure your agreement is fool-proof and has no loose ends. It is strongly recommended to have a real estate attorney or another qualified professional handle the paperwork. This will ensure someone is on hand to review the agreements before they are signed. Doing the extra work at the start will save you much time, money, and energy should issues arise.


Holding a Note on Real Estate

How Holding a Note Benefits the Seller


Though owner financed homes are not common, sellers would not hold notes if there was no benefit to it. The primary benefit of holding onto a mortgage note is the monthly income. After the downpayment is accepted, they’ll receive monthly payments, plus interest, from the buyer for the length of the contract. When you don’t require a large amount of money right when the home is purchased, holding a note is a great way to add an extra source of predictable income secured by real estate.


Offering the option for owner financing may also draw in more potential buyers. Without needing to work through the mortgage process with a bank, some buyers may be more attracted to your home and it could sell much quicker. Closing can take up to two months or more in some states when mortgages are involved, so holding onto the note allows you to potentially get your home off the market and money in your pockets within a few weeks.


How Holding a Note Benefits the Buyer


Holding a mortgage note also benefits the buyer. As mentioned above, the biggest advantage is not needing to deal with getting a mortgage from the bank. This can be a long and stressful process for many families looking to move into a new home. With an owner financed property, buyers will be able to come to an agreement and move in much sooner.


It is also possible that owners holding the note will have more lenient qualifications, allowing buyers to purchase a home they may not have been able to otherwise. If a buyer has less than a 20% downpayment, they will not need to purchase private mortgage insurance (PMI). This is required by many banks is the minimum downpayment is not able to be met.

Is Holding a Mortgage a Good Way to Make Money?


Offering to hold a mortgage note as a seller can be a great way to boost your income. By creating a win-win situation for you and the buyer, you can get a competitive price for your home and build upon your wealth. The buyer will also be able to own a home that they may not have originally been able to.


As a seller, it is important to protect yourself should something go sour with the buyer. Legal paperwork should be drafted or reviewed by a qualified professional to ensure everything is clear and to each party’s best interest. You may also want to have your home appraised. This will help you know the true market value of your property so you can negotiate offers and have an acceptable down payment in mind.


If you put in the work and get the appropriate paperwork in order, holding a mortgage note can be a great way to sell your home fast and earn some extra income in the process. Though there is no guarantee the buyer will follow through with your agreement, many people find the money they can make to be worth the risk. Ultimately, it is up to you to determine if holding a mortgage is the best decision for you and your financial future.


You should always get the advice of a licensed professional when determining investment options and strategies.


If you have any questions about selling real estate notes you hold on real estate, please feel free to contact us to explore this option.