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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
John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.
Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.
Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.
George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.
My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.
Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.