Seller financing provides a means for real estate owners and investors to access a larger pool of buyers and set their own loan terms. This process requires the creation of a mortgage note, which consists of two parts: a promissory note and a security instrument.
How to Create a Mortgage Note
A mortgage note is a promissory note secured by a mortgage or deed of trust. The promissory note spells out the terms of the loan including the loan amount, monthly payments, interest rate, and length of the loan.
We will cover these mortgage note topics:
What is the difference between a promissory note and a mortgage note?
A promissory note is a promise to pay a loan according to the agreed terms. Promissory notes are used in all types of secured and unsecured loans. A mortgage note is a promissory note secured by a lien on real property.
The two primary types of liens used are a mortgage and a deed of trust. Both of these security instruments guarantee repayment of the mortgage loan.
Deed of Trust
A deed of trust is a security instrument held by a trust and administered by an impartial third party known as a trustee, until the note is paid in full. When the note is paid, the trustee dissolves the trust and removes the lien from the property.
In the event of a default, the trustee pursues a non-judicial foreclosure, which is typically faster and less costly than a judicial foreclosure. In a non-judicial foreclosure, the trustee may initiate the sale of the property without involving the court system.
Mortgage
A mortgage is a security instrument held by the noteholder. If the borrower pays the loan in full, the noteholder is responsible for removing the lien from the property. In the event of a default, the note holder must obtain a decree of foreclosure from a court action in order to initiate the foreclosure process.
What to Include on a Mortgage Note
The Department of Housing & Urban Development (HUD) has provided model mortgage notes as a guideline to show what should be included. It is important to ensure your terms and conditions are unambiguous and that they are profitable for you while still being fair to the borrower.
Identifying Information for a Mortgage Note
The note should include the full name of each borrower and any co-signers that will be responsible for the repayment of the loan. It should also include the name of the legal name of the noteholder. If this is a business entity, the name of the business should be listed.
The property address must be included. Optionally, you can also include the legal description. The form should also include a promise to repay.
Loan Terms
The terms of the loan should be clearly defined and include the following:
- The amount borrowed
- Principal
- Interest/APR
- Length of the loan
- Prepayment penalties
- Balloon payment, if applicable
Payment Information
Payment information includes the following:
- How the loan will be repaid
- How often payments are made (usually monthly or bi-weekly)
- The periodic payment amount
- Due date each period
- Where to send payments
Default Procedures
The mortgage note should clearly explain the procedures that will be followed in the event of a default, including information about the following:
- Late charges
- How and when a Notice of Default will be issued
- How notices will be served
- Any relevant information about the foreclosure process
The Security Instrument
The mortgage note should mention whether a deed of trust or mortgage being used and how this may impact a property transfer, default, or payoff.
Signatures
Every borrower and co-signer, as well as the noteholder or any party authorized to sign on behalf of the noteholder, should sign the note. These signatures should be notarized.
FAQs
A mortgage note is a promissory note secured by a mortgage or deed of trust. The promissory note spells out the terms of the loan including the loan amount, monthly payments, interest rate, and length of the loan.
As the borrower, you’ll receive a copy of your mortgage note at closing, but the original is retained by your lender or mortgage servicer. This original note acts as the official record of your loan terms and is typically stored securely by the lender. In many cases, lenders may sell the original note on the secondary market shortly after closing as part of the loan servicing process. If you need to review or verify your mortgage note later on, you can request a copy from your lender or servicer, who can also provide details if the loan has been transferred to a new holder.
A promissory note is a promise to pay a loan according to the agreed terms. Promissory notes are used in all types of secured and unsecured loans. A mortgage note is on real property.
Selling your mortgage note frees you of the risks inherent in carrying a loan while also allowing you to receive a lump sum payment, which can be used to fund other investments.
How can Deed Street Capital help create a mortgage note?
Financing a mortgage loan can be risky. Selling your mortgage note frees you of the risks inherent in carrying a loan while also allowing you to receive a lump sum payment, which can be used to fund other investments. Contact us today to find out what your mortgage note is worth.