A mortgage note, also known as a promissory note, establishes terms of repayment when a buyer takes out a loan to purchase real estate. Typically, a mortgage note exists between a buyer and a financial institution. However, in some cases, the buyer may choose instead to secure a private loan. A private mortgage note requires buyers to make payments to a private individual or entity directly over the life of the mortgage rather than to a traditional lender.
A mortgage note clearly outlines the terms of a loan as they relate to purchasing property. It specifies the amount borrowed, the person or people who borrowed the money, and the lender.
As a legally binding contract between a borrower and a lender, a mortgage note helps to ensure a clear arrangement is in place for the life of the mortgage.
Secured Mortgage Notes
A secured mortgage note is backed by collateral —usually the property itself. Borrowers often find it easier to get a secure mortgage note, which carries lower interest rates and better terms than an unsecured loan.
Private Mortgage Notes
Private mortgage notes are secured by a private lender, such as a private individual, rather than by an institution. In some cases, buyers may get better terms by working with a private lender since private lenders can often set their own terms for mortgage loans.
Conventional or Institutional Mortgage Notes
Institutional mortgage notes are issued and backed by a financial institution, such a bank, rather than a private lender. They will often have specific terms and require that borrowers meet certain criteria.
A mortgage note specifies several components of the loan:
A mortgage note, or promissory note, is a document that represents the borrower’s promise to repay the amount of money they have borrowed. Mortgage notes contain the information stated above but are not recorded with the county. They are essentially IOUs between the lender and the borrower.
The mortgage —also referred to as the deed of trust—is a separate document that serves to secure the loan. This document is recorded with the county and contains an acceleration clause, which allows a lender to demand loan repayment in full if the borrower has defaulted on the loan. Defaulting on a loan can occur when a borrower violates any of the contract terms, but typically involves failure to make regular payments. It is the mortgage (deed of trust) that allows the lender to foreclose on the property to satisfy the debt.
You Might Have to Take Legal Action if the Buyer Defaults
In order to collect after a buyer fails to adhere to the terms of the loan agreement, the purchaser of a mortgage note may have no choice but to take legal action. It can prove difficult to move through the legal process and may cost more than many mortgage lenders anticipate.