Mortgage notes are a type of promissory note that details repayment of a loan used to purchase real estate. This legal document describes the amount of the loan and terms of repayment, including duration and interest rate.
In a private mortgage, the borrower makes payments to a private person or entity directly. That person or entity can choose to continue to receive payments, or sell their note for a lump sum.
What is a Mortgage Note?
A mortgage note is a mortgage in which the person receiving the payments is an individual, or private entity, rather than a traditional bank. The note acts as a lien against the property, which serves as collateral for the payment described in the note.
Both traditional, bank-sponsored mortgages and private mortgages include a mortgage note. The term “mortgage note” refers to the document that addresses the specific terms of the loan. As such, mortgage notes fall into the category of promissory notes, which include all legal documents detailing repayment, including mortgage notes, as well as other types of loans.
Mortgage notes act as an easily liquidated asset. Owners of private mortgage notes are able to choose to keep receiving the monthly payments described in the note or sell them to mortgage note purchasing companies.
Reasons Consumers Choose Private Mortgages
Stricter lending requirements and bruised credit scores led to an influx of private mortgage notes after the recent recession.
During the recession, many homes were left abandoned and fell into disrepair, making getting traditional mortgages next to impossible. Because homes must pass an inspection as part of a bank-based mortgage, a home that needs extensive repairs or renovations may only be able to be purchased through a private mortgage.
Those with less-than-perfect credit and those who are self-employed can turn to private mortgages when they might not qualify for traditional bank options.
Others use private mortgages to keep an asset in the family. If one family member is selling a home and another family member needs a home, it can make sense to pay the interest on a home loan to a family member rather than a faceless bank.
Risks of Holding a Mortgage Note
Those who own a private mortgage note are essentially acting as the bank would in a traditional mortgage and thus assume the risk just as the bank does.
Every loan comes with both the benefit of earning interest and the risk of failure to pay. Those who hold the private mortgage note — in other words, the person receiving the payments in exchange for the ownership of the property — should consider:
- Will the loan holders financial security be threatened if the homeowner cannot make payments on time?
- Does the homeowner have proper insurance covering the property?
- Is the property at risk to decrease in value from being neglected, or being in a bad location?
Those who hold mortgage notes have the option to sell them to mitigate those risks.
Facts on Selling a Mortgage Note
If someone with a mortgage note would rather not wait to receive the monthly payments, he or she can sell their mortgage note in exchange for a lump sum through the secondary mortgage note industry.
The industry provides options for note owners who need to cash out their investment. For those only needing a smaller amount of money, you can sell a portion of the expected payments on the mortgage note for cash now.
Selling your mortgage note can be a way to avoid the risk of a borrower defaulting, or it can simply be a way to quickly liquidate an asset into usable capital.
Even mortgage notes where the payments have not been regularly paid by the borrower are eligible to be sold.
Why Should You Sell Your Mortgage Note?
One of the benefits of owning a private mortgage note is that it’s an easy investment to quickly liquidate. Some owners find that they’d rather have a large lump sum in lieu of a slow trickle of scheduled payments. Other owners sell a portion of their future payments to get a lump sum to handle a sudden financial need.
Reasons for selling your mortgage note:
- Wanting capital to start a business venture
- Moving money to a different investment
- Funding a family milestone, such as a college education or wedding
- The need to divide an estate
- The need to divide marital assets, which include a mortgage note
- Concern about the risk of being a lender
Sometimes a homeowner turns to offering a private mortgage note to sell a house quickly, because the buyer is able to then bypass the traditional bank mortgage approval process. In these cases, the new note owners can sell the note quickly to receive the lump sum they needed all along.
How Can You Sell Your Mortgage Note?
These are the steps to selling a mortgage note:
- Gather all of the details of the note you own.
- Provide these details to a mortgage note purchasing company for a free quote.
- Examine the quote before submitting the contract.
- The purchasing company goes through the due diligence phase to get the details of the purchase in order.
- Closing occurs, and the seller receives his or her money.
Investors and businesses in the secondary mortgage note industry can buy private mortgage notes from those looking to sell. When a note owner wants to convert his or her note into a lump sum, the owner begins the private mortgage note selling process.
Before you begin the selling process, have all of the information on the mortgage note you own. These attributes include detailed information on the property, the interest rate, the term of the loan, the creditworthiness of the homeowner, and the homeowner’s equity in the property.