How to Buy Mortgage Notes A step-by-step walkthrough of how to buy notes. Real estate notes are the most popular notes for investing. This guide to buying mortgage notes is a comprehensive resource designed to help investors navigate the note-buying process.
We refresh the guide regularly as we field questions from our subscribers, interview experts, and evolve with the world of real estate note investing. Bookmark this page and check back often to stay up to date.
Definition of a Mortgage Note A mortgage note is a borrower’s written promise to maintain lender repayment terms. Also known as a promissory note or real estate notes, mortgage notes are legal documents, though lenders do not usually file them as public records.
The Different Types of Mortgage Notes
A mortgage promissory note is categorized by loan type, loan provider, lien position, performance, and asset class. Knowing the differences helps when it’s time to buy loan notes.
LOAN TYPE
Secured
When a tangible asset, like a property or a vehicle, is tied to a lien, it is called a secured loan. A lender typically offers better interest rates and increased spending limits on secured loans since they have legal rights to sell the asset if the borrower defaults on the note.
Unsecured
When a lender issues a loan without a tangible asset and bases approval on a borrower’s credit history alone, it is called an unsecured or signature loan. Unsecured loan interest rates are higher, and credit score requirements are more rigid than asset-backed secured loans.
LOAN PROVIDER
Private Loans
Loans issued by private organizations or individuals are called private loans or private money. A private money loan does not always follow traditional lending guidelines and offers borrowers flexibility in some cases. Investors may find private lenders with notes to sell, though the buying opportunities are usually limited to one per private seller.
Institutional Loans
Loans issued by credit unions, banks, and other organizations in the loan-writing business are called institutional loans. Institutional lenders follow strict guidelines with minimal flexibility but issue a lot of loans. Note investors working with institutional lenders benefit from recurring note availability, as opposed to the one-time private seller scenario.
LIEN POSITION
Lien position, aka lien priority or lien seniority, is the order in which the debt is paid in the case of default.
Debtors place liens (legal claims) on the property to secure re-payment. Lien positions are established by order of recorded filing date. Usually, the mortgage lender holds the first priority, and other liens tied to the property hold junior positions.
Typically, investors focus their investing either on “first position” or else on junior liens commonly referred to as “seconds.”
What Happens to Lien Positions During Foreclosure
If a foreclosure happens, the more senior the lien (first position), the more likely you are to be paid off and recover your investment because liens are paid off in order.
The trade-off in note investing is that while you pay much less for junior liens (often pennies on the dollar), you do not enjoy the same security as senior lien investors or investors in the first lien position.
ASSET CLASS
Real estate asset classes categorize property types with similar attributes. Note investors can buy a broad range of notes across asset classes, including:
- Commercial
- Multifamily
- Residential
- Construction
When you are starting out in mortgage note investing, the safest play is to invest in asset classes with which you are already familiar.
LOAN PERFORMANCE
Note investors, in addition to understanding lien position and asset classes, need to evaluate loan performance. Loans may be classified as non-performing, under-performing, performing, and re-performing.
Non-performing note: A note that is 90 days or more past due.
Under-performing note: Borrower has a history of being periodically late with payments.
Performing note A note being repaid on time and according to terms. Investing in performing notes is sometimes referred to as “clipping coupons” because the investor typically enjoys modest returns paid back at regular intervals.
Re-performing note: Borrower had missed payments, perhaps even went non-performing, but is now back on track. Sometimes these loans have been modified either by extended amortization, principal reduction, or interest rate reductions. One strategy note investors employ is to buy non-performing notes and get them re-performing and then selling the re-performing notes after seasoning (a period of on-time payments).
The biggest discounts for note investors usually come from non-performing notes, which are attractive to note investors for the steep discounts and multiple exit strategies. Performing notes are the most secure and offer the note investor reliable monthly payments backed (collateralized) by real property.
Dennis Dahlberg Level 4 Funding LLC
DennisLove.com
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383
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