Homeowners like you don’t think about their mortgage notes often. Yet, that document contains very important information about your property. More importantly, it has several uses you probably didn’t know about!
Let’s start by discussing the details stated in a mortgage note. We’ll talk about why it’s different from a mortgage loan or a deed of trust. Afterward, we’ll explain how buying and selling mortgage notes can help your financial goals.
Most people just leave their mortgage notes somewhere then forget about them. Little do they know, selling it could provide funds when needed. On the other hand, buying mortgage notes might be easier to purchase property than typical mortgage lenders.
Mortgage note vs. mortgage loan vs. deed of trust
If you own a house, it means you have the deed of trust. It states that you’re the owner of that property. The original copy is publicly recorded then returned to the buyer after a few weeks.
You have other important files besides the deed. One of them is the mortgage. It details the terms and conditions for your home loan. Also, it says what happens if the borrower defaults.
Borrowers want to make sure lenders pay them back. That’s why they often add a mortgage note, a legal document that states the borrower must repay the loan.
Otherwise known as a promissory note, it also states the terms of the mortgage. Yet, this security instrument provides fewer details. The original copy of your mortgage should have:
- The total amount you borrowed
- Your interest rate. If you have an adjustable-rate mortgage (ARM), you’ll see the initial interest rate.
- The penalties for being late on payments
- If you have an ARM, you’ll see specific details. The mortgage note will explain how the interest rate could change. Moreover, it will show the limits on how much it may increase.
Only the person who signed the mortgage note is responsible for paying the debt. Although, the deed may have other names on it. This means they’re also on the mortgage.
The other people on the deed and the mortgage aren’t liable for repayment. For example, your spouse may have poor credit. As a result, your partner isn’t listed on the note.
However, both of you are on the deed. This means you should all be on the mortgage too. As a homeowner, you should know the difference. Each has different legal implications.
Why buy mortgage notes?
That copy of your mortgage note has other uses. Let’s start with purchasing these documents. This became popular in the 1930s because of the Federal Housing Administration.
The FDA’s rules added specific standards and other requirements. Unfortunately, it left a large portion of borrowers. They either have poor credit or no credit history.
Nowadays, some properties still don’t meet the FHA standards. The owners can’t afford to improve them enough. As a result, they can’t sell their homes using the FHA process.
Moreover, the recent pandemic increased home prices at an alarming rate. This made it more difficult for first-time buyers in the real estate market.
Fortunately, private mortgages became a win-win for home-hunters and investors. It allows the former to buy a house even with bad credit. It might be a great option during the pandemic.
Lenders are stricter to borrowers due to the economic uncertainty. It’s much harder to prove that they could pay back loans. Banks may ask for higher credit scores and interest rates.
Meanwhile, they need a place to stay to avoid the virus. It is still the best way to keep themselves safe. Not everyone is vaccinated, and they may have to wait a bit.
On the other hand, people could buy mortgage notes as an investment. Here are some of the ways they gain returns from these documents:
- Selling mortgage notes to other investors
- Rehabbing them then reselling to other investors
- Buying to acquire and sell the property
- Originating seller-financed notes for resale or income
- Making private cash loans to real estate investors
Why sell mortgage notes?
Homeowners could earn money from their notes. Your lender may have sold your mortgage to others already. Still, you may continue to live in your home.
This doesn’t mean you’re off the hook from monthly payments, though. However, the person holding your mortgage note needs you to pay on time. If you default, they lose money.
A homeowner has two options when selling their note. First is the full buyout program. The buyer gets the remaining note payments, and the seller gets a lump sum.
On the other hand, they could do a partial purchase. The investor buys a certain number of payments on the note. They take the note over until they receive the payments.
The note holder has two options. They could sell more payments. Alternatively, they could continue getting the payments. This gives funds upfront and a stream of future income.
Moreover, the seller could get more money. The investor takes on less risk since they’re only buying part of the mortgage note. There are many reasons why homeowners may want to sell:
- Pay student loans
- Clear medical bills
- Build emergency fund
- Fund expensive home repairs or renovations
- Set aside money for retirement
- Invest in more real estate
How to buy and sell mortgage notes
Those interested in selling their notes need a mortgage note purchasing company. Make sure it follows the law. Call your state securities regulator to see if the business is registered.
What’s more, look for certain qualities in your note buying company. Check for these traits to make sure you get high-quality service:
- Trustworthiness – The company should give an estimated price without asking you to sign something first. Otherwise, they may be up to something shady.
- Experience – Get the companies that have done business for several years. They know more about pricing and the process than newer companies.
- Reliability – The company should be easy to contact. You may reach them via phone, email, or social media.
- Accreditations – The best have earned numerous certificates and awards. These prove that others recognize the company’s excellence.
Decide carefully on selling your mortgage note. Weigh your options and determine your goals. Afterward, check the following steps of the process:
- Gather all the information found on your note. Refer to the earlier section of this article for more details.
- Give these details to your mortgage note buying company for a free estimate.
- Check the quote before submitting the contract.
- The purchasing company gets the details of the purchase in order.
- Once everything is set, the deal’s closed, and you receive your money.
It’s best to have a real estate attorney help you with this. They could guide you through the process, making sure it goes smoothly.
Final thoughts
Your mortgage note is an important document. It shows your legal liability for repaying your home loan. What’s more, it could be a source of urgent funds.
Still, there are alternatives to selling your note. For instance, you have home equity loans as one of your options. Elderly homeowners may qualify for a reverse mortgage.
However, you must manage your finances in other ways. Budgeting reduces the chances you’ll ever need to sell your note. This lets you build an emergency fund instead.
If you need help managing your money, ask a financial advisor for more information. Please check your options carefully before trying any of these financing options.
Learn more about mortgage notes
What is the difference between a mortgage and a mortgage note?
A mortgage explains the conditions of your home loan, such as the interest rate. Meanwhile, a mortgage note states the people who should pay that debt.
What does a mortgage note include?
A mortgage note will state the total you owe and the interest rate. Also, it details the penalties for being late on payments. You will also see the limits of how much the interest may increase.
How do you buy property notes?
You may purchase them from a mortgage note buying company. It’s best to hire a real estate lawyer to guide you through the process.
