A promissory note is the contract between Borrower and Lender. It is one of the most important aspects of private lending. Buy what is a mortgage note? and what should it contain?

What is a Mortgage Note?

There is often some confusion as to what a mortgage note (herein after referred to as simply a ‘note’) actually is. As a private lender, there are two parts to your investment; a promissory note, and a lien. Both are equally as important, but serve very different purposes.

Related: Private Lending 101 – A Complete Introduction to Private Lending

What Does a Promissory Note Contain?

The note is the contract between Borrower and Lender. It 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

Is a Note Recorded?

No. The 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 holds the 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 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.

Related: My Private Lending Deal Assessment Checklist

External Resources:

Wikipedia 

Rocket Mortgage

Policy Genius