Mortgage Note, real estate note, promissory note, or simply just a note. However you refer to them, they are an essential part of the real estate ecosystem. But what exactly is a mortgage note? and what terms should it contain? in this article we take a look at mortgage notes through the lens of an investor.
- What is a Mortgage Note
- What Terms Should a Note Contain
- Is a Mortgage Note Recorded
- Who Owns the Note
- Can I Use a Template Mortgage Note
- Performing Notes vs Non Performing Notes
- Some More Note Investing Articles
What is a Mortgage Note?
There is often some confusion as to what a mortgage note or real estate note (herein after referred to as simply a ‘note’) actually is. In fact, there are two parts to what most people refer to as a note; a promissory note, and a lien. Both are equally as important, but serve very different purposes.
The note is an IOU. Simply put, it is a contract between borrower and lender. The note defines the terms of the loan.
The lien is a separate document – usually a Mortgage Deed or Deed of Trust – and acts as security for the lender. It is recorded against the title to a piece of real estate in the County records.
What Terms Should a Mortgage Note Contain?
The note contains the terms of loan. These terms will usually include:
- The original loan amount
- The interest rate
- The term of the loan – usually in months
- The amount and schedule of each payment (i.e. monthly or quarterly)
- The maturity of the loan
Notes can (and should) also contain the following information:
- An amortization schedule
- Reference to the real estate used as security
- What constitutes a default on the part of the borrower
- What happens if the borrower defaults
Every note is different, and you should seek the advice of a suitably qualified attorney to ensure that your note contains all the relevant terms and conditions (and correct legal working) specific to the State the associated real estate is located in.
Is a Mortgage Note Recorded?
No. The mortgage note is not recorded in the County land records. The lien (mortgage or deed of trust) is recorded, and must usually be settled if the real estate is sold or transferred.
Who Owns the Mortgage Note?
The Lender holds the note, so this could be the original lender, or an investor that has purchased the note. Whoever owns the note at the time holds it in their possession. When the note is repaid in full, it is marked as paid and returned to the Borrower.
Can I Use a Template Mortgage Note?
There are plenty of promissory note templates available online. But, if you are new to private lending, I would highly recommend that you speak to a qualified real estate attorney and draw up your own template. you can adjust it on a deal by deal basis.
Performing vs Non Performing Mortgage Notes
There are two types of mortgage note: performing notes and non performing notes. A note is considered to be performing when the borrower is current on all payments. Performing notes are valuable, income-producing assets, and so they trade at, or close to, face value.
Non performing notes are effectively bad debt. This is where the borrower has stopped making payments and is 90 days or more behind. Banks and other investors sell non performing notes with big discounts to the face value to recoup some of their capital and avoid costly and lengthy foreclosure proceedings.
These deep discounts make non performing notes potentially very profitable for investor capable of getting the borrower to start paying again, or foreclosing the loan and taking title to the real estate. But, investing successfully with this strategy takes time, resources and a lot of knowledge.
Some More Article on Note Investing
- Where to Buy Mortgage Notes – A Complete List of Verified Sources
- Note Investing 101 – Everything you Need to Know About Note Investing
- What is a Note and What Terms Should It Contain?
- Performing vs Non-Performing Notes – Which is the Better Investment?
- The Private Lender’s Guide to Assessing Credit Risk
- Understanding Lien Position and Priority
- How to Buy Mortgage Notes Online in 2021
- How to Assess Real Estate for note Investing and Private Lending
- Find Performing Notes for Sale in 2021
- Private Lending 101 – Everything you Need to Know About Private Money Lending
- Is Buying Mortgage Notes a Good Investment in 2021?
- Note Investing vs Rental Properties – Which is the Best Investment?
- Performing Notes – What Why and How to Buy
- Is Real Estate Note Investing Risky?
- Real Estate Notes vs REITs – Which is the Better Investment?
- The 3 Best Real Estate Investing Opportunities in 2021
- What is the Difference Between a Note and a Mortgage?
I hope you found this article useful. Remember, if you are looking for mortgage notes for sale, you can learn about our private lending program here.