Promissory notes and mortgage notes, these two terms have been thrown around for years, sometimes even used interchangeably.  This is especially true when it comes to buying a house.   Is there a difference between a mortgage note and a promissory note?  If so, do you know what it is and does it matter?

Yes, there is a difference between a mortgage and a promissory note.  The mortgage, also known as a deed of trust, is the document that provides the security for the loan.  The promissory note is the actual binding document with the promise to pay back the loan. Each document should contain some items to be considered a promissory note or a mortgage.

The promissory note must include the name of the borrower, the address of the property (if applicable), the interest rate, either fixed or adjustable, the amount of the loan, the term or number of years of the loan, and a late charge amount.  It will include both the lender’s and borrowers rights and responsibilities.  This document is not recorded in the county land records.  Think of this like the pink slip when selling a car. The lender is the one who holds the promissory note during the time the loan is outstanding. When the loan is fully paid off, the note is then given to the borrower like a pink slip is given to the fully paid off owner of a car. Promissory notes can be used for a variety of loans such as commercial loans, student loans, bank loans, and real estate loans.  It does not have to be tied to a physical piece of property.

The mortgage note, or deed of trusts’ purpose is to provide security for the loan.  It must include the name of the borrower, the address of the property, and the legal description of the property. It will also contain a clause that will allow the lender to demand the entire balance of the loan should the borrower default on loan.  This is called an Acceleration Clause. If the borrower continues to default on the loan, the lender can begin foreclosure proceedings, and the real property can be sold to satisfy the debt.  Unlike the promissory note, the mortgage note is recorded in the county land records after the borrower has signed it.  When the loan is paid off, the lender will record that the loan has been satisfied with the county land records.

When purchasing a home, the borrower will actually be signing two separate documents, the promissory note and the deed of trust.

Promissory notes are a negotiable instrument that can be transferred or sold and endorsed (signed over), to a new owner. When the new owner of a note first attempts to collect on the note, a letter should be sent to the borrower asking for repayment.  This should include a copy of the promissory note.

When unsure about what one is dealing with, promissory note or mortgage note, it is always best to consult with a professional.

The old adage of knowing when to hold and knowing when to fold is even more true when it comes to selling your mortgage note. In fact, there are a huge number of perspective sellers who have no idea that they haven’t got to sell the total today, and we’re finding more and more advantages associated with holding/retaining part of your note.

When it comes to your mortgage note, sometimes it just doesn’t make sense to sell the whole thing, or it’s just not a viable, safe option. It’s important to realize that your home is your biggest investment, and as such, when you’re not able to sell your note at the price that you want, you’re set to lose a sizable chunk of money via your houses depreciation values. More often than not, because of the diminishing rates of return on homes, most buyers will only purchase full notes with large amounts of equity.

You’ll have your work cut out for you to determine how to best interest a potential buyer to determine the value of your home (through a loan to value ratio or LTV). This works by simply dividing what your note is worth by the value of the property. When you’re unsure, use your sales price as an estimate to get a ball park estimate.

Here’s an easy example of a loan to value ratio equation:

Your Property Value: $200,000/ Your Remaining Balance: $100,000 = LTV of 50%

When it comes down to a small number like the one above, you’ll have a great chance to sell the property. Most buyers will purchase a full when the LTV when the value is below 70% of the value. Most are looking for at least a 30% equity margin, proving that you’re invested in your home to use against the risk of foreclosure.

When it comes down to it, generally your mortgage notes fall well short of equity requirements, and therefore aren’t complete to sell. When you’ve got a particularly high LTV, your rate of return isn’t going to make you much money- which is when selling a partial is more important.

We’ve compiled a few Pros and Cons to help you make your decision:

Pros

• More cash in your pocket, and freedom from your note requirements
• No risk of default to the bank, giving you less management on your mortgage
• Easiest transaction process imaginable

Cons

• Bigger Discount on property value levels
• You’ll lose property retention opportunities
• Lost income, and the costs of lost interest
• Sometimes you’ll face equity restrictions

While it might not make sense to sell your whole full mortgage, it often makes more sense to use a smaller amount of cash to pay off a big bill (i.e. taxes, car payments, deferments) when you don’t want to take all of the cash out of your note, or only want to retain enough of the income to get a little cash today.

Many sellers don’t need to sell the whole note, and understand that buying partials benefits them more in the long run, so many sellers will be interested your note when you’re selling a partial for a little extra pocket cash.

Talk to our trained specialists for more information. We’ll find you the best bang for your buck, no matter what your situation may be.

If you have sold a property with owner financing, then you now own a note. If you purchased a note, now what do you do with it? What do you do other than wait for the monthly payments to come in?  How should you care for your note? There are many steps you should take to keep you note safe.

Safeguard you note

Safeguarding of your note is just as important as other important documents you may have: pink slips, social security cards, birth and marriage certificates, or will and so on.   If an attorney assisted in the closing of the property, sometimes, the attorney will keep the original note document and give you a copy. You have the option of keeping the actual note yourself.  It is a good idea to keep the original note with the original mortgage of deed of trust which will be returned to you after it has been recorded at the county recorder’s office.

Keep a detailed payment history

Record keeping of the payments made on a note is necessary. This is help prevent any questions that may arise about payments made or not made.  Even if you have no plans to ever sell your note, it may help the borrower should he/she decide to refinance if you have a balloon payment. Or, if there comes a time when you decide to sell, the accurate payment history will help you get the highest possible price.

When the check arrives, make sure you deposit it into your own bank account. This is an added record that the payment was received. Copies of the check and/or deposit slip is also recommended.

Make sure taxes are paid

Property taxes and income tax need to be paid. If you are collecting escrow for taxes, it is easy to have property taxes paid. If not, make sure you verify that the property taxes have been paid by having the tax parcel number along with due date in order to be able to check  if they have been paid.

Another tax that needs to be paid is income tax.  If the property you sold is being used as the buyers’ primary residence, you must notify the borrower, the amount of mortgage interest paid during the year as required by the IRS. This must be reported by January 31 of the following year.

Don’t forget about Homeowner’s Insurance

Homeowner’s Insurance is vital to keeping your investment protected. Guaranteeing that a policy exists is not adequate. You must also make sure you are listed as the Mortgagee on the insurance policy and that the policy is covered for the balance of the mortgage note.  This ensures that you are covered should anything happen.  If there is a lapse in policy, you can purchase the policy yourself or prospect of adding the property to your own homeowner’s policy could be an option. The cost of this insurance would be charged to the buyer either up front or on the balance of the note.

Maintaining a property in good condition

The property is your investment and it is in your best interest that the purchaser continues to care for its upkeep both inside and out. If the borrower should ever default on the property, in order to get the best selling price is to make sure that the value of the property has not been reduced by poor care. Plus, a good property will help keep the borrower making payments on a regular basis. Check on your property yearly or have someone do so for you. By knowing the condition of the property, should the borrower default, or you want to sell the note, there will not be any surprises.

Late Payments and Default

If the check was mailed to you late, keep the envelope it arrived in to prove the date it was mailed/received late.  This is especially helpful if you are qualified for a payment penalty. Be sure that you are familiar with the notes’ grace period if it exists. Making detailed records of any attempt to collect on a late payment after the grace period should be noted.  This includes time and date of any phone calls, copies and proof of any correspondence through certified and return receipt mail.  If these steps do not produce any payments, the next step is to seek professional help from an attorney. Seek an attorney familiar with this type of law.  If you try to take matter into your own hands, you could find it difficult to enforce all areas of your contract. If you do nothing, this may be taken as acceptance. Be consistent in your actions. If you allow a late payment one month but send a notice another month, this does not present a clear message to the borrower. Do not delay the foreclosure process if the borrower is more than one month behind.

Good record keeping

It is essential to be organized about all paperwork and when payments are due. Besides the monthly payment, if you know when property taxes are due, insurance is due, and have the knowledge to look up if they have been paid, this will go a long way in keeping your note protected.

You only have so much ability to keep you investment protected. The other responsibility lies with the borrower. But by doing all in your power to keep your records straight, it will go a long way should a late payment occur, a default take place, or should you decide you want to sell the note.

Promissory notes are IOU’s, the physical evidence that a transaction took place a debt is owned.  In real estate, these notes state that a specific amount of money is owned to a specific person on a specific date. It also states interest, length of loan, the real estate used as the guarantee or the debt to be paid, the amount due after the interest has been met, and any default terms.

When there is owner financing and the lender is an individual, there may be a situations where the original note has been misplaced and lost. A replacement needs to be made with new documents to ensure that the debt remains in place or to enforce the debt should a foreclosure occur.   In some instances, the holder of the note might be the only one able to enforce it. The note is also needed should the note holder decide to sell to another lender/investor cashing out either all or part of the note.

Seek professional advice to help get a replacement note.  An Affidavit of Lost Promissory Note needs to be signed, notarized and recorded. This will include a statement that the original note has been lost, stolen, or damaged. The affidavit will also include the circumstances surrounding the loss using as much detail as possible. Details describing the lengths taken to look for the document as well as any other details about its’ disappearance should be included.

The Affidavit of Lost Promissory Note instructions are clear asking for information on the debt, what has been paid, what has not been paid, and that the note is not in default. The affidavit should state that the note has not been sold or transferred to another party. The purpose of the affidavit also is to get the borrower to sign the new note with the agreement that if the original note is found, the replacement note supersedes the original note and it will not be used as a separate debt.

If a copy exists, review it. In some notes, lost, stolen, or damaged notes may be addressed in the contract. This may include provisions that should such an instance occur, the borrower must sign the new promissory note. Include by attaching a copy of the note to the affidavit. This affidavit is to be notarized.

Once completed, it is ideal to place the note in a secure location such as a safe deposit box. A third party servicing company can also take care of safe keeping the note to ensure it does not get lost or damaged again.