Mortgage Notes for Investment

Info_lover | May 16, 2010 |

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Mortgage note is basically a loan agreement created when a home is sold. It serves a mortgage as proof of the debt and will define the interest rates under which the mortgage will be repaid. Mortgage notes for sale can range anywhere from $10,000 to even tens of millions of dollars. Private mortgage notes are typically funded by a home seller rather than a bank or lending institution. These mortgage notes are also known as cash flow notes, seller financed notes, or owner financed notes. There are plenty of mortgage note buyers or investors who will pay cash to purchase mortgage notes. They will in turn take over the monthly payments that went to the previous owner of the mortgage note.

It is rare to see cases where the buyer of the mortgage note takes over the entire remaining sum of monthly payments. The most common mortgage note purchase is known as a partial purchase which describes the situation in which a mortgage note buyer offers to buy only a certain number of the remaining payments on the mortgage, rather than purchasing the entire note. The payments are then reverted back to the original note holder once a stipulated number of purchased payments have been made by the borrower to the temporary note holder.

Why would a Private Mortgage Note be created?

There are several reasons as to why a home owner may choose to fund the transaction in a private manner. One reason could be that private transactions tend to get approved and funded much more quickly as compared to a bank funded loan. Another reason is that the lending criteria may not be as strict as they might be if a bank is involved, and this increases the buyer pool for the seller's home.

Why would an Investor want to buy Mortgage Note?

Due to the time value of money, a private mortgage note is often sold at a discount. This basically means that the value of the mortgage will decrease with time because of factors such as inflation. Thus, the mortgage note buyer will pay a discounted rate for the loan to the current mortgage note holder and, will in return receive all future payments made on the loan by the mortgagee.

Comparison to other investments

What is the advantage of buying mortgage note over a tax deed certificate? The answer is simple. A mortgage note will allow you to collect the interest on a monthly basis, whereas a tax deed certificate is only paid when the lien or deed is redeemed.

Why would a Note Holder want to sell Mortgage Note?

There are many reasons on why people will sell mortgage notes. For starters, the note holder may need a large sum of money immediately for other ventures, be it purchasing a home or starting a business. Whatever the reason may be, a large sum of money is deemed to be more valuable to the note holder rather than the smaller amounts that are received on a monthly basis. Also, selling mortgage notes means that the note holder will be free of worries over whether the mortgagee will default on the loan.

How does a Note Holder know whether the Note is a Good Investment?

Generally, it is necessary to evaluate the risk associated with the mortgage note so as to determine the value of the note. When buying mortgage notes, one will have to consider the following criteria used to assess risk:

the credit worthiness of the mortgagee (the person making payments on the loan)
the status of the loan (current, in default, late payments, etc)
the amount of the down payment made on the property
the terms of the loan (interest rate, length of term, etc)
the value of the property which serves as collateral for the loan

Individual mortgage note buyers should know their own risk appetite and evaluate mortgage notes based on the above-mentioned criteria. This will help them in determining their own standards for assessing the amount of discount that is offered on the mortgage note.