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.

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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.

Mortgage notes are a great way to invest for income

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.

Related: Note Investing 101 – Everything you Need to Know About Mortgage Note Investing

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.

Ultimately, you want to be certain that both the note and the mortgage or trust deed contain terms sufficient to protect your investment in a worst case scenario.

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.

A Lien such as a mortgage deed or trust deed Secures Your investment

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.

Related: My Private Lending Deal Assessment Checklist

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.

Return on investment for performing notes

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.

Related: Performing vs Non-Performing Notes – Which is the Better Investment?

Some More Article on Note Investing

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