What is a Mortgage Note?
Posted by Admin on March 8, 2019 | 0 Comment
What is a Mortgage Note?
Put simply, a mortgage note is a promise to repay a specific mortgage debt.
It’s a contract — a written agreement — that says the person buying the property in question will pay the seller back XX amount of money over XX amount of time. The contract will also specify and interest rate on that repayment, as well as the mode of payment. The seller will hold the note until the full payment is made by the buyer.
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. 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.
How a Mortgage Note Works
The best way to understand how a mortgage note works is to look at a seller-financed mortgage. In this scenario, the person selling the home finances the buyer’s purchase, and the buyer makes regular monthly installments to pay down their debt. The contract between these two parties is called a mortgage note (or promissory note).
The seller has the option to keep collecting these payments until the debt is repair or sell the note to a note buyer for a lump sum.
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 a 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 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 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.
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 their note 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.
Considering Creating or Selling a Mortgage Note?
If you’re considering seller-financing a property or creating 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.