What Is A Mortgage Note?

What are Mortgage Notes?

Put simply, a mortgage note is a promise to repay a specific mortgage debt.

A mortgage note is a legal document which describes the terms of repayment of a loan secured by real estate. The terms include a loan amount, interest rate, payback period among other items.

A mortgage note is a transferable instrument that can be sold and traded between parties. The entity or person collecting on the payments can choose to sell the mortgage note on the open market for a lump sum of cash. When someone decides to sell a mortgage note, this is called a loan assignment.

The party who holds the mortgage note has the legal right to receive monthly mortgage payments, making the note a source of predictable income. Typically, the mortgage lender drafts the mortgage note during the real estate closing process, detailing the loan terms and repayment obligations. After mortgage approval, the borrower signs the mortgage note, formalizing their commitment. Until the loan is fully repaid, the note is held by the lender or investor, who technically retains a property interest through the associated mortgage or deed of trust.

Mortgage note payments, covering both principal and interest, are usually made on a monthly basis. Making mortgage payments regularly is important, as it helps maintain credit standing and protects the borrower’s ownership rights. When the borrower eventually pays off the mortgage, the note is canceled, and full ownership of the property is transferred free of debt.

Key Takeaways

1. A mortgage note lists the terms of a loan such as interest rates, payback periods, and mode of payment.
2. It includes the length of the loan, its amount, and when it needs to be paid off.
3. There are multiple types of notes, such as a secured, unsecured, house, private, and institutional notes.
4. A mortgage note holds legal significance and can be used in the court of law.
5. New trends evolve: mortgage tokenization is a rising trend in the cross-border financial environment.

What is an example of a Mortgage Note?

A mortgage note is a document that describes the loan terms and conditions of a loan secured by real estate. A mortgage note usually contains the word “Note” at the top header of page one. The lender and the borrower information is generally in section one.

Sections two, three, and four usually contain the terms of the loan such as the interest rate, the payback period, the payment amount, and escrow information if applicable. Mortgage notes are usually between one and five pages depending on the transaction and property type. 

Download the Mortgage Note Example here

What Does a Mortgage Note Include?

Though they may sound complicated, mortgage notes actually contain all the information buyers and sellers need to keep track of the mortgage repayment schedule on a piece of property. It may help to look at a sample mortgage note if you’re wondering, “What does a mortgage note look like?”.

The note first lists the amount of the mortgage loan. Due to the buyer placing a down payment on the property, this will likely not be the actual price of the property. The mortgage note then identifies the interest rate of the loan, or how much on top of the principal loan the buyer will pay the seller.

Next comes the length, or term, of the mortgage loan. This simply states in what amount of time the loan needs to be paid off. Next, similar to a rental agreement, the mortgage note states what dates each monthly payment will be due from the buyer. This could be the first or last of the month or any other agreed-upon day, but it is generally the same time every month.

Finally, the mortgage note details the penalties for missing payments, including late fees and the seller’s right to foreclose on the property if necessary to recover income lost from the buyer’s chronic payment defaults.

Different Types of Mortgage Notes

Mortgage notes can be further sub-categorized into four types:

Secured notes

A secured note is backed by a lien on real property. If the borrower misses payments, the lender can claim ownership of the asset if the borrower misses payments.

Unsecured notes

The loan is not collateralized and the risk is higher. The value of the note decreases when selling the mortgage note to a private note buyer.

House notes

We get this question a lot… “what is a house note?”.  A house note is a term used in industry to describe a mortgage note. The average house note will look similar to a mortgage note as far as language and structure.

Private notes

Private notes are typically created between private parties, such as family members or a private seller. A private mortgage is usually created without institutional backing, offering flexibility but often less oversight. Private note buyers often purchase these types of notes on the secondary market, seeking opportunities with customized terms. The key takeaway is that the mortgage note contract is created between private parties such as family members or a private seller.

Institutional notes

Meanwhile, institutional notes tend to be originated by formal organizations like banks or lending institutions. Business note buyers specialize in purchasing notes tied to commercial properties and small businesses, allowing sellers of such notes to access a different segment of the secondary market. In simpler terms, the loan is created by an institution like an organization or bank. Institutional notes are usually more regulated than private loans.

Mortgage Tokenization: A Modern Twist on Traditional Financing

Mortgage tokenization represents a cutting-edge advancement in the way mortgage notes are managed, traded, and secured. At its core, tokenization involves converting the rights to a mortgage note into a digital token on a blockchain. This digital representation carries all the legal rights and obligations of the original paper document, making it a novel method for securing and transferring ownership.

How Does Mortgage Tokenization Work?

The process begins by converting the mortgage note into a digital format, which is then divided into tokens. These tokens can be bought and sold on blockchain platforms, providing a secure and transparent way to trade these assets. Each token is encrypted, ensuring that only authorized parties can access the sensitive information it contains.

Benefits of Mortgage Tokenization

Tokenization offers several distinct advantages over traditional mortgage note transactions:

1. Increased Liquidity: By converting mortgage notes into tokens, they can be sold in parts to multiple investors, enhancing liquidity in the real estate market.
2. Transparency: Blockchain technology provides a clear record of ownership and transaction history, reducing the potential for fraud and errors.
3. Efficiency: The process of buying and selling tokens is often faster and less cumbersome than dealing with physical or even traditional digital documents, streamlining operations significantly.
4. Accessibility: Tokenization can open up investment opportunities to a broader audience, allowing small investors to participate in real estate markets traditionally dominated by large players.

Challenges and Considerations of mortgage tokenization

While promising, mortgage tokenization also faces regulatory, technical, and market acceptance challenges. The legal framework for digital tokens is still evolving, which can pose uncertainties regarding enforcement and compliance. Additionally, the reliance on blockchain technology necessitates robust cybersecurity measures to prevent unauthorized access and ensure the integrity of the tokens.

What is a Mortgage Promissory Note?

A promissory note is a document that could be used to describe the terms and conditions of a real estate loan as well as other types of personal properties and assets, such as small business loans and auto loans. 

How to Get a Copy of Your Mortgage Note

If you misplace or lose your original mortgage note and wish to get a copy, you could do so by contacting the counterparty (lender or borrower) in the transaction to see if they would be willing to forward you a copy. This is usually an easy fix.

The mortgage note is typically signed at the real estate closing, alongside key disclosure documents. Your closing disclosure will reference the mortgage note among the documentation provided at signing.

Also, if the loan is being serviced by a 3rd-party, it would also be easy enough to reach out to the 3rd-party servicer to request a copy as well. You will not be able to find your mortgage note online or in public records. Mortgage notes are not recorded in county records like other mortgage documents such as mortgage deeds and deeds of trust.

Legal Significance of a Mortgage Note

A mortgage note is a legal instrument that outlines the terms and conditions for the repayment of a loan or promises to pay, thus the term promissory note. Mortgage notes will contain the loan terms such as: loan amount, date of first payment, date of maturity, interest rate, payback period, and other relevant items.

It will also describe the remedies to be undertaken in the case of default, legal venue, and instructions for early payoff.

Mortgage notes are often traded on the secondary mortgage market, providing lenders and investors with liquidity options that traditional lending might not offer. Because a mortgage note is a security instrument that legally binds the borrower to repayment, it carries enforceable legal rights if disputes arise.

The secondary mortgage note industry plays a vital role in keeping the market fluid, allowing capital to move between originators and investors more freely. Since a mortgage note is a security, it is treated under legal frameworks that safeguard the rights of both the holder and borrower, reinforcing its status as a binding agreement enforceable in court.

What’s Included in Your Mortgage Note?

A mortgage note will contain the exact terms of the loan such as loan amount, interest rate, amortization or payback period, payment amount, escrow information (if applicable), balloon payment (if applicable), maturity date, default interest rate, and legal venue in the case of a dispute.

How a Mortgage Note Works

A mortgage note’s main function is to describe the loan terms and legal conditions of residential or commercial real estate loans. Within the language of the mortgage note, there will be a reference to a security instrument such as a Mortgage (not the same as a mortgage note) or a Deed of Trust.

The language will tether the mortgage note (the loan) to the security instrument (the Mortgage or Deed of Trust) which will legally bind the two documents together. This is done so that in the case of default, the loan is collateralized or secured by the property that was pledged or sold.

What is the Difference Between a Mortgage Note and a Mortgage?

It’s easy to confuse a mortgage note with a mortgage (often referred to as a mortgage deed) since both are part of the real estate buying process. The mortgage note is, at its simplest, a promise to pay back the loan. It requires a contract, which spells out the loan terms, including payment schedule, interest rate, amortization period, and more. It may also include the consequences of non-payment.

Mortgage notes are usually:

1. Between private parties – Most mortgage notes are contracts created between private individuals — one property owner selling to one buyer. They’re not generally a product of big banks or financial institutions. Mortgage loans tend to be more commercial, between a larger business and an individual or pair of individuals.

2. Not recorded with local government – With a mortgage loan, the contract between the buyer and lender is recorded with the local government using a deed. In a mortgage note situation, the seller holds the note instead, and it is not recorded with any governmental agency.

3. Re-paid on a monthly basis – This is one area where mortgage loans and notes are similar. Both typically require a monthly payment from the buyer until the full balance of the debt is paid off. The big difference is the action the lender/seller can take should the buyer fail to pay.

4. Might contain an acceleration clause – Because mortgage notes pose more risk, a seller may consider adding an acceleration clause to the contract. These make the buyer liable for the entire remaining balance of the loan if they miss a payment.

A mortgage (or mortgage deed), on the other hand, is a document outlining the collateral that secures the loan — i.e., the house, property, piece of land/real estate. Mortgage deeds are security instruments, meaning if the borrower doesn’t pay back their loan, the property can be sold to repay that debt and cover the lender’s losses.

Mortgage Deeds vs. Deeds of Trust

Both mortgage deeds and deeds of trusts are security instruments, and both are intended to protect the lender in the event the borrower fails to pay or defaults on their loan.

The main difference is that one involves two parties and the other involves three. With a mortgage, there is just the lender and borrower. When a deed of trust is used, there are three: the lender, the borrower and a trustee, who holds the property’s title until the loan is paid off. This trustee is typically a title company, bank or escrow company.
The use of these documents depends on where the transaction occurs. Some states use mortgage deeds, while others use deeds of trust.

Mortgage Notes Can Be Risky

Holding a mortgage note can offer a consistent income stream, but it also poses a risk for the seller. If the buyer falls behind on a payment or fails to repay the debt at all, the seller may be out a significant amount of cash or they could see their liquidity drained. Though they can take legal action against the buyer, this can often take time and lots of financial resources to complete.

Selling a Mortgage Note

Because of the financial risks a mortgage note poses, many holders decide to offload their note and sell it to what’s called a note buyer.

There are many mortgage note buying companies specializing in purchasing residential and commercial notes directly from sellers, offering a more straightforward path to liquidity. Companies that buy mortgage notes usually prioritize notes with strong payment histories and clearly structured agreements, as these features reduce their investment risk. Working with experienced note buyers ensures a smoother and more transparent sale process for sellers. Additionally, some note holders choose to work with mortgage note brokers, who can match them with potential buyers in exchange for a fee.

As the note holder, you have the legal right to sell or transfer the mortgage note, and when a mortgage note is sold, the rights to collect payments transfer to the new buyer. The buyer will now receive the monthly payments originally owed to the seller. Selling a mortgage note can also improve liquidity by moving the asset into the secondary market, where most transactions of this nature occur. Consistent mortgage payments help maintain the note’s value over time, making it more attractive for buyers. Ultimately, the mortgage note would be assigned to the buyer, closing out the seller’s financial interest in the note.

The biggest benefit of selling to a note buyer is that it means a single, lump sum. There’s no waiting for the loan to be repaid over months or years of time, nor is there any risk of non-payment. The seller gets their agreed-upon payment all at once, and from a trusted financial expert, to boot.

Offloading a mortgage note also means the seller no longer has to collect payments or deal with the day-to-day management of the mortgage — a big benefit to an already busy investor.

How Much is a Mortgage Note Worth?

There’s a lot that goes into determining a mortgage note’s worth. The terms of the financing agreement, the qualifications of the buyer, the size of the down payment, the interest rate on the loan and the buyer’s payment history and credit all play a role. Sellers who are interested in selling real estate notes are usually best served by getting a quote before moving forward.

Mortgage Notes Can Be Sold in Full or Partially

Mortgage notes can also be sold either in full or just partially. A partial sale gives the seller a smaller lump sum payment, while also allowing them regular, monthly payments as well. It also gives the seller someone to share the financial risks of the note with, in the event the buyer is unable to repay the loan.

A full sale means no more collecting payments, and it also eliminates the risks associated with the mortgage note. It does cut out the monthly income, but it means a larger, one-time lump sum payment instead.

A quick note: Not every note buyer offers both full and partial note sales, so make sure to speak with a qualified buyer before deciding which route to take with your note.

Selling a mortgage note doesn’t have to be an all-or-nothing decision. Note buying is a common strategy for investors seeking to balance immediate liquidity needs with future income potential. In some cases, a partial sale can even result in the creation of a new note for the remaining balance, allowing sellers to retain a smaller ongoing interest while cashing out a portion upfront.

Considering Creating or Selling a Mortgage Note?

Whether you’re looking to sell or buy mortgage notes, understanding how a note is structured can make a substantial difference in the value you ultimately receive. Investors who are new to this field often ask where to buy mortgage notes. Working with reputable platforms and established note buyers is critical to minimizing risk and ensuring proper due diligence.

A mortgage note investment can offer predictable monthly cash flow for income-focused investors or a lump-sum payout for those looking for faster liquidity. Holding mortgage notes can also serve as a valuable long-term investment strategy, especially when used to diversify a real estate or income-generating portfolio.

If you’re considering seller-financing a property, creating a mortgage note or looking for an example of a mortgage note, read our tips on how to structure your note first. The more you’re able to follow these guidelines initially, the more you’ll stand to gain should you sell the note later on down the line.

If you’re ready to offload your note and cash in on your profits now, contact Amerinote Xchange today for a complimentary quote.

The Role of Mortgage Notes in the Foreclosure Process

Mortgage notes play a crucial role in the foreclosure process as they are the legal documents that bind borrowers to their repayment obligations.

If payments are missed, foreclosure proceedings may be initiated to reclaim the property, protecting the lender’s financial interest. During foreclosure, the lender must often produce the note to prove legal ownership and enforce repayment rights. This ensures that only the rightful note holder has standing to pursue legal recovery.

In cases of default, the party pursuing the foreclosure must produce the note as evidence in court proceedings. If the borrower defaults, the lender can begin foreclosure proceedings under state-specific laws, typically by selling the collateralized property to recover the outstanding debt.

Furthermore, foreclosure laws and timelines vary significantly between states, adding to the complexity. By selling a mortgage note, lenders can avoid these headaches. This transaction transfers the burden of debt collection and the risks of foreclosure to another party, allowing the original lender to quickly liquidate the asset and reallocate resources more efficiently.