Even wondered, “what is a mortgage note?” You are likely familiar with notes. If you have borrowed money to purchase a car or home, you have signed and agreed to terms to pay a company to back for money they have loaned you for a certain amount, certain interest rate, to be paid off by a certain time frame.
You became the lendee. The giver of money was the lender. If the debt was not paid within the outline terms, as the lendee, you could have lost the car or home (also known as collateral).
With real estate, this newly created note can also be sold to another person or entity for profit or cash flow. We call that mortgage note investing.
Mortgage Note Basics
A mortgage note also known as a real estate promissory note is a document signed by a borrower that states they promise to pay back a loan to lender. The borrower makes a pledge to lender. The document itself is created from the borrower’s perspective with “I” statements.
A real estate note is a short 1-3 page document that should be drafted by attorney, as there are federal and state legal requirements.
Many people get a mortgage note and mortgage/deed of trust confused. Remember a note is the borrower’s pledge to pay back a loan.
The mortgage/deed of trust pledges the actual real estate as collateral and further outlines what a lender can do if the loan is not paid as agreed.
What Is In a Note?
The writing style of a note varies depending on who is the originating lender. A standard multistate Federal Fannie or Freddie MAC promissory note may look much different than a simple note created by a single property owner doing seller financing.
However, most notes will contain the following information.
A Promise to Pay
This will include a borrower’s promise to pay an original lender with a total principal amount due also including interest.
Interest rate on the unpaid principle is listed on the note. Interest on an unpaid principal amount is due until the loan is fully paid off.
Payment
This includes the monthly payment amount due each month by the borrower and the types of payments accepted (cash, check, ACH, etc). In addition, a note should include where to send the mortgage payments.
Notes typically list the first payment date due and what day of the month with maturity date, which is the date the full amount is due.
Right to Prepayment
Prepayments allow borrowers to pay off a mortgage before the maturity date. Some notes include a right to make extra mortgage payments to reduce the amount of principal money owned to a lender. Prepayments can be applied to principal and/or interest. The borrow must let the lender know where to apply prepayments.
Prepayment penalties hit borrowers with financial penalties for paying ahead. Federal law prohibits most prepayment penalties. However, in some instances this is legal.
Loan Charges/Failure to Pay
If a lendee is overdue on a payment, the lender is owned the full monthly amount (principal and interest) plus late fees.
If not paid by a specified date in the note, then the lendee is in default. A notice of default (a written notice sent to borrower if they are late with payments) can then be issued.
Some notes have acceleration clauses that give the lender the ability to collect payments faster. This says that the lendee must pay the full principal amount plus interest if borrower falls behind on payments.
If not paid in full monthly, the lendee will also owe the lender attorney’s fees and any other costs associated with enforcing the note.
Giving Notice
This section describes where to send any notifications about the note to the borrower. Typically, notifications are sent to the property address or to the address requested by the borrower.
Obligations
Each person who signs a mortgage note is responsible for the note. If more than one signer, each person listed as a borrower on the note, must fulfill the contract as agreed.
Signatures
Finally, the note is signed by each borrower.
Mortgage notes do not need to be notarized as they do not have to be recorded in the county where the property is located.
Notes are solely an agreement between lender and lendee and do not convey any property transfer.
Lost Your Note?
Do not worry if you lost your mortgage note. Simply reach out to your lender and request a copy from them.
You May Also Want to See:
- CFD vs. Mortgage/Deed of Trust – What’s the Difference?
- Unlocking Cash Flow: Harness Mortgage Note Investing and Be Your Own Bank
- Demystifying Mortgage Note Investing: How to Get Started Now!
- 8 Ways to Make Money with Real Estate Note Investing
- Struggling Wholesalers to Thriving Note Investors – Our Story
