Key Takeaways of How Mortgage Notes Work

• A mortgage note is a legal document signed by the buyers/borrowers when closing on a mortgage.
• A mortgage note is a contract pledging property as security for the money being borrowed. It gives the lender the right to repossess the property if the mortgage payments are not paid promptly and regularly, as spelled out in the contract.
• The mortgage note contains all specific facts of a loan, including interest, payment amount, start date and penalties for late payment.
• A mortgage note is the document that you sign at the end of your home closing. It should accurately reflect all the terms of the agreement between the borrower and the lender
• Once the mortgage note is signed by both the lender and borrower, it becomes legally binding.

You may have wondered how mortgage notes work when you made the decision to embark on real estate investing. You probably immersed yourself in a plethora of information about market conditions, financing options for property flips, and strategies to maximize returns using different investment methods and can you use mortgage notes in your business..

Discussions with your peers might have covered areas like spotting distressed properties, purchasing rental assets with growth potential, or getting involved in property development. Although private mortgage notes may have been brought up in conversation, this investment avenue sometimes is difficult to figure out. Developing a thorough comprehension of how mortgage notes work opens the door to a lucrative niche within the investment arena.

What Does A Mortgage Note Look Like?

A mortgage note is the legal document that sets out all the terms of the mortgage between a borrower and the lender. It includes terms such as:

• The total amount of the home loan
• The down payment amount
• Whether monthly. bimonthly or other periodic payments are required
• Whether the mortgage is fixed or has an adjustable interest rate
• If there is a prepayment penalty

Who Holds The Original Mortgage Note?

A mortgage note is held by the mortgage provider, the lender. Because a mortgage note is a security instrument, it can be bought and sold on the secondary mortgage market. Therefore, mortgage lenders sometimes sell mortgage notes to real estate investors who are attracted to these investments and have the potential to earn passive income. We are buyers of real estate notes. If you have a mortgage note that you would like to sell, please continue reading below and fill out the form at the bottom of this page.

Do I Act Like a Bank?

Many individuals holding private mortgage notes never planned to enter the realm of private lending. It is common for investors to find themselves in possession of a private mortgage note as a result of their business ventures. For instance, after purchasing and renovating a property, you may find yourself in a situation where the market conditions are not ideal for selling. During the sales process, it is clear that considering all possible scenarios is crucial to maintaining cash flow to prepare for future opportunities.

Imagine a scenario where a potential buyer approaches you, facing challenges in securing a traditional bank loan. This individual’s creditworthiness has been impacted by a recent divorce, despite possessing available cash reserves and demonstrating a commendable payment history on their previous rental property. After careful evaluation, it appears advantageous to accept a $50,000 down payment for a $200,000 residential property, structured with a five-year term at a 10 percent interest rate.

By opting for this arrangement, you not only receive a substantial initial payment but also ensure a steady stream of income supported by the property’s inherent value. Following mutual agreement and the completion of necessary documentation, you officially step into the role of a private mortgage note holder.

Types of Mortgage Notes:

Mortgage notes are categorized by the types of Owner Financing Agreements. If the title passes to the purchaser at the closing of the sale, then the security agreement will be a mortgage or deed of trust. If the seller maintains title to the property until all payments are made, the security agreement will be a land contract, agreement for deed or contract for deed.

A Mortgage Note lays out key info about the loan:

• The total amount of the loan
• The borrower’s promise to repay the loan
• The interest rate
• The monthly or periodic payment
• The term of the loan or the date when all payments are due
• What happens the borrower fails to repay the loan.
• Any fees or penalties, such as a prepayment penalty

If you are the payor on a mortgage note, be sure to read up on your obligations and rights as a borrower. Different mortgage notes may have different expectations. For instance, if you’re using the property as your primary residence, that might be outlined in your mortgage note.

Mortgage Note VS Mortgage Loan

It’s important to clarify that a mortgage note is not the same as a mortgage. While both are a legally binding agreement, a mortgage is a type of secured loan used to buy a home whereas a mortgage note is the document you sign at closing promising to repay that loan.

What happens to a mortgage note if the borrower defaults?

If you the borrower stops making mortgage payments, the mortgage lender or servicer has the right to start the foreclosure process. The lender will use the mortgage note to move forward with these proceedings, starting with a notice of default.

What happens to a mortgage note if it is prepaid early?

If the mortgage note is paid off early by making extra payments, or by a lump sum payment, the mortgage note is considered satisfied once it is paid off. When the mortgage is paid, either early or over the full term, the lender will give the borrower the original promissory note and give it to the borrower. The borrower is released from his promise to repay. The lender will also release any lien they had on the property, so it is owed free and clear.

What happens to the original mortgage note in a refinance? 

When a mortgage note is refinanced, the new lender will replace the original mortgage note with a new one. Once the refinancing is complete, the original mortgage note will be canceled. All future mortgage payments will be made to the new lender towards the new refinanced note.

Can Mortgage Notes be Sold?

If you find yourself in need of cash for any reason, consider selling a private mortgage note. This time, you’re on the selling side of the transaction compared to when you were the buyer.

It’s important to be aware that skilled negotiators may attempt to purchase your mortgage note at a significant discount, combining it with other notes in their portfolio which they then sell as a package. This process mirrors the practice of major lending institutions that quickly sell notes to servicing banks after underwriting.

When considering selling mortgage notes be sure to look for an established long term note investor with serious and credible reviews.

How do we price mortgage notes?

Ultimately when we look at a note to buy anywhere if the U.S. … we look at a few factors.

1) The note: Payment amount, loan terms, # of remaining payments.

2) The asset: A bit about the property or asset backing the note. If it’s a quality asset, the note will be worth more.

3) The borrower: The seasoning on the note, credit profile, payment history, etc.

Once we understand the situation, we’ll make you a fair offer. This offer is based on the value of the note, the risk of receiving on-time payments from the borrower, and the quality of the real estate securing the note.

Want to Sell a Mortgage Note? Then fill Out this Form:

Are You Looking for Mortgage Notes to Buy?

Once you have a note, you might decide that buying more notes creates an interesting mix of cash flow with varying note maturities. Think of having a number of certificates of deposit paying monthly interest but maturing at different calendar dates. There are private mortgage notes you can buy… many times marketed via real estate investment clubs or private lenders.

You can also advertise in local markets offering private financing. Check usury laws to ensure you are not exceeding your state’s regulations for interest terms.

Remember that you assume the risk on the note if the property buyer goes into default. While you can foreclose, that might lead to high court costs and rehabbing a property again. Therefore, price the note for a comfortable return.

When serving as a private lender, the note might be anywhere from two to six percent above standard loan rates. When buying a note from an existing private investor, consider the remaining term and whether the risk has declined. Offer anywhere from 60 to 80 percent of the note’s remaining value based on your risk assessment (Property value, credit of payor & property equity) and of course your desired return on investment.

5 Key Takeaways when buying Mortgage Notes

• First you need to find real estate notes (Mortgages, Deeds of Trust, Land Contracts, Agreements for Deed)
• Once you find potential notes to buy, you will need to qualify them. … check borrower credit, payment history, property value and title search
• Negotiate a purchase price for the note based on your cost of money or expected/required return
• Funding the note purchase … preparing closing documents, getting noteholder signature and surrender of promissory note
• Wire funds into noteholder account

If you are interested in learning more about how mortgage notes work, give us a call at (772) 232-2383 or send us a message

We are here to help you develop the knowledge and skills to succeed.