What is a Mortgage Note?
Posted by Admin on August 5, 2018 | 0 Comment
A common question we receive from potential clients and people in general is ”what is a mortgage note”. Put simply, a mortgage note is a promise to repay a specific mortgage debt usually secured by real estate.
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.
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. 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). 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 two or more parties – Most mortgage notes are contracts created between two or more parties – institutions, individuals, corporations governments, etc.. One property owner selling and financing to a one buyer.
2. Not recorded with local government – In a mortgage note situation, the lender holds the note as a promise to pay (IOU). It is not recorded with any governmental agency (with the exception of certain states). Most people get this confused with a mortgage (deed) which is recored with the local county recorders office.
3. Re-paid on a monthly basis – Mortgage notes typically require a monthly payment from the buyer until the full balance of the debt is paid off.
4. Might contain an acceleration clause – Because mortgage notes pose risk in the case of total default, 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.
What Does a Mortgage Note Look Like?
We obviously went over the function of this financial instrument but what does a mortgage note look like? A mortgage note is a document that is usually anywhere from 1 to 10 pages of a contract outlining terms of a pay back agreement between 2 or more parties over a set period of time.
This is also referred to as an IOU or the more common financial term, a loan. It will usually have the header or title at the top of one or more page (usually page one) that says “Mortgage Note”, “Promissory Note” “Real Estate Lien Note”, “Balloon Note” “Installment Note” or “Purchase Money Mortgage Note” . It could have other names like “Real Estate Contract” depending on the state. The note is usually only signed by the borrower or the person making the mortgage payments.
How Do I Get a Copy of My Mortgage Note?
Where can I get a copy of my mortgage note? If you are making payments on a mortgage note as a borrower and misplaced your copy, you can contact your lender or loan servicing company and requesting one. If you are collecting payments as a lender and lost the original, ink-signature note you may be able to file a “Lost note Affidavit” in lieu of the original. Most states allow it, some do not. Be sure to check in you local and state requirements via an attorney, abstract company or title company.
Mortgage Notes Can Be Risky for Lenders and Investors
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.
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 retain many thousands of dollars in the future. 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 require a deeper discount when selling on the secondary market, 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 to sell, 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.