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Need help with a Mortgage Note?
What Is A Mortgage Note?
A mortgage is a type of contract where a lender loans a specific amount of money to a borrower that is secured by real estate. The mortgage note is the document the borrower signs at the end of their home closing. It contains a mortgage note description and all of the terms of the agreement between the borrower and the lender and reflects all the terms of the mortgage.
Put simply, a mortgage note is a promise to repay a specific mortgage debt.
Who Signs A Mortgage Note?
Because the mortgage note states the amount of debt, the rate of interest and obligates the borrower personally for the repayment thereof, the borrower signs the mortgage note.
Here is an article about a mortgage note and who signs it.
Parts Of A Mortgage Note
So, what does a mortgage note look like? The best way to answer this question is to look at a mortgage note example. In such an example, the person selling the property finances the buyer’s purchase, and the buyer makes regular monthly installments to pay off the debt.
Keep in mind that it’s quite different from a purchase agreement , and here, the seller has the option to keep collecting the monthly payments until the debt is paid off or to sell the note for a lump sum.
Because the mortgage note is a legal document that sets out all the terms of the mortgage between a borrower and lender, it includes terms such as:
- The amount of the mortgage loan . This is the actual amount borrowed from the lender. Because the buyer will likely place a down payment this will likely not be the actual price of the property.
- The interest rate payable by the borrower . This is the amount that the borrower will pay to the lender on top of the principal loan amount.
- The down payment amount . This is the first amount that the borrower will pay to the lender, generally when signing the contract, and is typically not part of the amount of the mortgage loan.
- Whether monthly or bi-monthly payments are required . This determines whether the borrower will pay back the amount of the loan in monthly or bi-monthly payments.
- Whether the mortgage has a fixed or adjustable interest rate . With a fixed interest rate, the borrower and the lender agree on an interest rate when they negotiate the contract. The borrower then pays this fixed interest to the lender in addition to the loan amount. In contrast, an adjustable interest rate will vary as the generally accepted interest rate varies.
- If there are penalties . Penalties can take the form of either prepayment penalties or penalties for missing payments. It's a good idea to agree on these penalties at the time when the agreement is entered into to avoid any disputes later on.
Because these are all essential parts of a mortgage note, the parties must make sure that all the information contained in the mortgage note description of the parties, the payment terms, and the interest rate is completely accurate. This ensures that both the borrower and the lender are protected.
Here's an article on the parts of a mortgage note.
Mortgage Note Vs. Mortgage
Because both are part of the real estate buying process, it's often easy to confuse a mortgage note with a mortgage, also commonly referred to as a mortgage deed. At their simplest, a mortgage note is a promise to pay back the loan whereas a mortgage is a document outlining the collateral that secures the loan.
Here, it's important to remember that mortgage notes are usually:
- Created between private individuals and not generally a product of big banks or financial institutions. Unlike mortgage notes which are contracts between a property owner and a property buyer, mortgage loans tend to be more commercial and generally entered into between a larger business, like a bank and an individual.
- Not recorded with the local government using a deed. Here, the seller holds the mortgage note, and unlike mortgage loans, the contract is not recorded with any government agency.
- Repaid on a monthly or another fixed basis. Here, mortgage loans and mortgage notes are quite similar in that they require a regular payment (either monthly or bi-monthly) from the buyer until the balance of the debt is paid off. The big difference is that, with a mortgage, the property can be sold to repay the debt. With a mortgage note, the seller can take legal action against the buyer to recover the losses, but this often takes time and a lot of resources.
- May contain an acceleration clause. To reduce the risk of mortgage notes, the seller might incorporate a clause into the contract that makes the buyer liable for the total amount outstanding if one payment is missed.
Another thing to keep in mind is that a mortgage deed should not be confused with a deed of trust. Although both are security instruments and intended to protect the lender when a borrower fails to repay their loan, the difference is that one involves two parties and the other involves three.
With a mortgage, there is just the lender and the borrower, while with a deed of trust there is a lender, a borrower, and a trustee who holds the property's title until the loan is paid off. The trustee is typically a title company, bank, or escrow company.
Also, with a mortgage, the grantor of a mortgage may still be liable for the mortgage even after a property has been transferred through the execution of a quitclaim .
Here is an article outlining the difference between mortgage notes and mortgages.
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Buying And Selling Mortgage Notes
Buyers need to be aware of the fact that the seller or the holder of a mortgage note can sell the mortgage note without the consent of the buyer. For mortgage and real estate investors, mortgage note investing through brokerages or as part of larger mortgage bundles can be quite a profitable investment opportunity.
And it makes sense for holders to sell their mortgage notes because of the financial risks that it carries. The biggest benefit, though, for holders to sell their notes to a note buyer is that they’ll receive a single, lump-sum payment instead of waiting for the loan to be repaid over months or years. This, effectively, also eliminates any risk of non-payment.
An additional benefit is that the seller no longer has to collect payments from the lender or manage the mortgage day by day. It's important to keep in mind that this will only be the case when the mortgage note is sold in full. When only sold partially, the seller will receive a smaller lump sum payment but also regular monthly payments thereafter. This, unfortunately, leaves the seller with some risk and management of the loan.
In respect of the borrower, there's not much difference when the holder of the mortgage note sells it. The details and terms will stay the same and the only thing to change will be the recipient of the monthly mortgage payments. For this reason, it's always a good idea to double-check the status of the mortgage note and make sure that the ownership has actually changed.
So, if your mortgage note is sold, you might ask, “where can I find my mortgage note?”. Generally, the seller or lender holds the original mortgage note, and the buyer receives a copy. If this copy gets destroyed, it's possible to request a new copy from the lender.
Here is an article about the buying and selling of mortgage notes.
Getting Help With A Mortgage Note
Because mortgage notes often deal with substantial amounts of money, it's vital that all the information in them is accurate and correctly reflects the agreement between the parties. Apart from the mortgage, it’s always best to make sure that other documents like a purchase and sale agreement is in order.
Luckily, many real estate lawyers can help buyers and sellers when it comes to buying and selling property and preparing mortgage notes. If you need any more information on mortgage notes or assistance in preparing one, feel free to post a project today in the ContractsCounsel marketplace.
Meet some of our Mortgage Note Lawyers
Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.
I'm a Washington-licensed lawyer specializing in trademark practice and with an extensive trademark education and academic background. I currently work with domestic and international businesses seeking trademark protection in the U.S. by conducting trademark searches, providing legal advice, submitting USPTO applications, and preparing responses to office actions. I'm passionate about trademark law and always looking forward to helping small and medium businesses promote their value by having a registered federal trademark. If you have questions or concerns about trademark/copyright/IP licensing and require legal advice, feel free to contact me so we can have a first chat.
Mr. Pomeranz serves as the principal of Pomeranz Law PLLC, a boutique law firm representing clients across myriad industries and verticals. Before founding the firm, Mr. Pomeranz served as Senior Vice President, Legal & Compliance and General Counsel of Mortgage Connect, LP in 2017. Mr. Pomeranz also served as Counsel, Transactions for Altisource Portfolio Solutions S.A. (NASDAQ: ASPS) beginning in 2013, and was based in the company’s C-Suite in Luxembourg City, Luxembourg. Mr. Pomeranz began his career with Mainline Information Systems, Inc. as an in-house attorney.
I have 10 years experience providing general counsel, in the form practical and timely legal advice, under strict deadlines to individuals and various business unit stakeholders, balancing commercial needs with legal concerns at large corporations and start-ups. I am skilled at reviewing, analyzing, drafting and negotiating commercial and government contracts globally for the procurement and sale of services and goods. I also help clients ensure compliance with regulations (including data privacy), laws and contractual obligations and protect, enforce and exploit intellectual property rights and support in the development of IP strategy. I am a Certified Information Privacy Professional/United States (CIPP/US) licensed by the IAPP - International Association of Privacy Professionals.
Over 15 year experience drafting, reviewing and negotiating contracts both as in-house counsel and in law firms, including my own law firm.
Rinky S. Parwani began her career practicing law in Beverly Hills, California handling high profile complex litigation and entertainment law matters. Later, her practice turned transactional to Lake Tahoe, California with a focus on business startups, trademarks, real estate resort development and government law. After leaving California, she also served as in-house counsel for a major lending corporation headquartered in Des Moines, Iowa as well as a Senior Vice President of Compliance for a fortune 500 mortgage operation in Dallas, Texas prior to opening Parwani Law, P.A. in Tampa, Florida. She has represented various sophisticated individual, government and corporate clients and counseled in a variety of litigation and corporate matters throughout her career. Ms. Parwani also has prior experience with state and federal consumer lending laws for unsecured credit cards, revolving credit, secured loans, retail credit, sales finance and mortgage loans. She also has served as a special magistrate and legal counsel for numerous Florida County Value Adjustment Boards. Her practice varies significantly from unique federal and state litigation cases to transactional matters. Born and raised in Des Moines, Iowa, Ms. Parwani worked in private accounting for several years prior to law school. Her background includes a Certified Public Accountant (CPA) certificate from Iowa (currently the license is inactive) and a Certified Management Accountant (CMA) designation (currently the designation is inactive). Ms. Parwani or the firm is currently a member of the following organizations: Hillsborough County Bar Association, American Bar Association, Tampa Bay Bankruptcy Bar Association, National Association of Consumer Bankruptcy Attorneys, and the American Immigration Lawyers Association. She is a Fellow of the American Bar Association. Ms. Parwani is a frequent volunteer for Fox Channel 13 Tampa Bay Ask-A-Lawyer. She has published an article entitled "Advising Your Client in Foreclosure" in the Stetson Law Review, Volume 41, No. 3, Spring 2012 Foreclosure Symposium Edition. She is a frequent continuing legal education speaker and has also taught bankruptcy seminars for the American Bar Association and Amstar Litigation. She was commissioned by the Governor of Kentucky as a Kentucky Colonel. In addition, she teaches Immigration Law, Bankruptcy Law and Legal Research and Writing as an adjunct faculty instructor at the Hillsborough Community College Ybor campus in the paralegal studies program.
Possesses extensive experience in the areas of civil and transactional law, as well as commercial litigation and have been in practice since 1998. I addition I have done numerous blue sky and SEC exempt stock sales, mergers, conversions from corporations to limited liability company, and asset purchases. I have worked in commercial litigation, corporate and transactional law, intellectual property and bankruptcy. In recent years I have expanded my practice to include family law, personal injury, medical malpractice, and wrongful death.