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What to Know before Buying Mortgage Notes

April 30th, 2014    •  

What to Know before Buying Mortgage Notes

Buying home mortgage notes could provide the smart investor with good returns without the troubles and dangers of purchasing fixer-uppers, finding renters for the unit or having to unclog commodes and make other needed repairs that may come up.

When most people think about home loan notes they think of market giants such as Bank of America or Wells Fargo. According to Mortgage Bankers Association estimates, these institutions will originate $1.3 trillion in residential mortgages this year.

But there is a subset of the home mortgage market called private notes, which can be originated in a number of ways.

A typical private note is called a “seller financing note”—that is created when the homeowner agrees to provide his customer a loan for all or a portion of the homes price. Usually the principal and interest payments are structured to amortize over a 30-year duration like conventional loans, yet can call for a balloon payment– meaning the debtor has to remit the entire outstanding principal– after a predetermined number of years.

The assumption is that the customer will, during this predetermined number of years, re-finance into a conventional-type loan from an institutional lender. The note holder could foreclose and take back the home if the debtor is not able to pay the full amount after the preset time frame. The biggest danger to the note holder is that the net sale profits of the foreclosure sale could be insufficient to cover the note balance.

These seller financing loans are normally made by borrowers that are not able to qualify for conventional institutional financing. This could not always be a reflection of the debtor’s creditworthiness. For example, under existing institutional guidelines, numerous self employed borrowers with high incomes and good credit scores still do not qualify for many traditional loans. Seniors deal with similar difficulties.

For these reasons, seller financing notes usually carry a higher-than-market interest rate. It is this higher rate of interest that makes them desirable to real estate investors.

Private mortgages likewise come from personal lending institutions that are willing to lend cash to home buyers at above-market rates; lenders are protected by the debtor’s residential property as security. These investors will want to conduct due diligence not only on the debtor’s potential to pay back and on the home’s market price and condition should the investor need to foreclose.

Private home mortgages are easily saleable in a strong secondary market. Their higher-than-market rate of interest make them desirable as “buy and hold” investments, private mortgage notes can be sold and thus converted into cash. The amount they sell for is based on the principal balance, the number of payments that have actually been made, the number of remaining payments, the home’s market value and the debtor’s creditworthiness.

The concept of “time value of money” determines just how much you would want to pay for a private mortgage note. This concept dictates that receiving a dollar today is worth more than receiving a dollar in the future. There are tools readily available online that will calculate the value of a future stream of income. What this means is that the seller of a private mortgage note cannot expect to market his note for the outstanding principal balance of that note. Rather, he can sell it just for the discounted “present value” of the sum of the future repayments.

Here is an example to illustrate this concept. A homeowner sells his house on June 1 for $500,000; he insists on a 20% down payment of $100,000 and agrees to lend the buyer the remaining $400,000. He agrees to amortize the private mortgage loan over a 30-year period with a balloon payment after 5 years. The note bears an interest of 5% annually.

To “season” the note, the seller holds it for six months and gets 6 regular monthly payments of principal and interest. After the 6th payment, the outstanding principal balance of the note is $397,086. By using the present value calculator, we see that today’s value of this note is $317,669. This value is then a baseline for the note’s purchase price. Depending on the other factors, such as home’s condition, market interest rates and the borrower’s creditworthiness, the price a note buyer would be willing to pay might change up or down accordingly.


If you currently own a real estate note and are in need of immediate cash, we would like an opportunity to bid on and possibly BUY YOUR NOTE! With over 20 years experience in the private note industry, our experienced staff is available to provide you with a quick quote and help make it easy for you to get the most for your note. Visit us today at www.notebuyingusa.com or contact us at 1-877-399-1211. If you are considering offering owner financing when you sell your property, please click here to receive your free copy of “10 Critical Steps to Creating a Sellable Note”.

This information is intended to be used as a general guide. It is not intended to constitute legal advice and is not a substitute for the advice of an attorney. While every effort has been taken to present the information accurately, this document may not be infallible. No warranty is made that these materials are current, complete, accurate, or suitable for any particular purpose. You should seek advice from your attorney before proceeding with any real estate transaction.


1. What to know before buying mortgage notes, Harry S. Jacobs, February 28, 2014, The Washington Post, http://www.washingtonpost.com/realestate/what-to-know-before-buying-mortgage-notes/2013/04/18/0481cabe-a37d-11e2-b44febada3a8_story.html , Retrieved 3/4/14.

  • About Us

    NoteCom, Inc. specializes in the purchase of owner-financed, privately held, real estate notes. We are a direct buyer of real estate notes, thus eliminating costly broker fees and allowing you to receive the maximum cash offer for privately held real estate notes.

    With over 20 years of experience in the private note industry, our experienced staff of experts is available to provide you with a quick quote and makes it easy for you to get the most for your note.

  • Contact Us

    Mailing Address
    P.O. Box 1064, San Benito, TX 78586

    Physical Address
    551 N. Williams Rd, Suite D,
    San Benito, TX 78586

    Local: (956) 399-1199
    Toll Free: 1-877-399-1211
    Fax: (956) 399-8794