A mortgage note is a document you sign at the closing of your mortgage that obligates you to repay the mortgage at a specific rate and over a specific period of time. When you sign the mortgage note at closing, you become personally responsible for repaying the mortgage.
A mortgage is what ties you to your house. It legally requires you to make payments on the loan the bank provides you to buy real estate. There are many legal and financial consequences of this process, such as the loan amount, interest rate, due date, and other terms specific to the loan that the mortgage note lays out.
What is the Difference Between the Mortgage Deed and the Note?
It's easy to think that the mortgage note is your promise as the borrower to repay the lender for the money you receive from them to buy the property. That is not the case. It's simply the contract between you and the lender, and it is recorded with your local government. Similarly, a mortgage deed acts like a mortgage note in some states and uses the property to guarantee the loan.
The instrument that promises your repayment of the mortgage is the promissory note. The lender holds this document, which explains why it is not recorded with the local government. The lender does not return it to you until the debt is repaid in full.
The promissory note between you and the lender may contain some of the same details found in your mortgage note, but it simply works as a promise by you to pay them back.
Risks of Holding a Mortgage Note
Investing in real estate is a common way individuals like to diversify their investments. It provides monthly income, and once the holding is paid off they will have more cash to count on each month. A subset of real estate investing is buying mortgage notes.
Buying mortgage notes allows individuals the ability to invest without the hassle of buying property. This sounds great, but it's dependent on the borrower repaying the loan. If they don't repay the loan, you as the lender can obviously be out the money you lent. Additionally, this can impact your liquidity as you are personally loaning out the money to the borrower.
Lenders typically offer owner financing if borrowers aren't able to secure funds through traditional channels.
How to Sell A Mortgage Note
There's a lot to keep in mind if you want to sell a mortgage note. You are lending funds to a private individual, so it's important to do your due diligence prior to making the decision.
With that in mind, here's what you need to do to sell a mortgage note, according to leading real-estate investor site BiggerPockets:
- Deal with the down payment. Does the party in question have a down payment? If not, the note may not be saleable. The more they're able to put down makes the note more valuable as it's viewed as less of a risk.
- Consider the creditworthiness of the borrower. You need to look at this loan possibility like a bank would; the better the credit, the less risk posed by the borrower.
- Recourse vs. Non-recourse. Are you requiring a personal guarantee (recourse) of the borrower, or is there no guarantee (non-recourse) that they'll make repayment? Understandably, notes with recourse are more valuable.
The above are the basics of what you need to do to ensure the mortgage note can be sold. Below is how you sell the note:
1. Request a quote.
2. Provide document copies of the settlement statement, promissory note, and contract.
3. Review the offer and accept the agreement.
4. Note buyer review – this is considered the due diligence where everything is evaluated.
5. Get an appraisal to determine the current property value.
6. Do a title search.
7. Attend closing.
There are resources available to help you sell a mortgage note; just make sure to do your due diligence to ensure a positive return.
Why Should You Sell Your Mortgage Note
Seller financing is a great way to further diversify your investment opportunities. The challenge comes in when you realize that you are essentially acting as a bank to the borrower.
If it helps the individual out, and you can make a nice return, that may be fine, but it brings some additional headaches you may not want to bear. With that in mind, here are some of the reasons individuals sell their mortgage notes:
- Buying a new house or remodeling a current home
- Finding a new investment opportunity
- Needing the funds to cover a financial surprise or large expense
- Paying for college tuition
There are certainly other possibilities why someone would sell a mortgage note. Ultimately, it leads to a secondary market, presenting an opportunity to savvy investors.