Private Mortgage Notes


The term “private mortgage notes” includes any mortgage notes or deeds of trust held by a private individual as a seller carry-back note or an investment. Seller carry-back notes are created when the seller of a property agrees to finance the purchase of that property by carrying a mortgage note or trust deed in which the buyer of the property is the mortgagee and the seller of the property is the mortgagor. Some notes are also created when a private investor offers to hold the mortgage on a property that he may or may not have owned and sold. In that case, the buyer of the property would be the mortgagee and the investor would be the mortgagor.

There are individual and corporate investors who purchase these notes when the holder of the note wants to convert the note to a lump sum of cash. The notes are typically not purchased for the face value of the note. Buyers take into consideration the time value of the money being offered for the note and calculate the return they would like to earn on that money. The purchase price offered will be lower than the face value of the note based on those two factors, although all other elements of the note, such as interest rate, any balloon payment included, and monthly payment amounts remain the same. The payor of those payments does not have to agree to the sale of the note. He or she will be notified of the sale after it is finalized and will be told to whom to send payments following the sale.

High quality notes may be sellable as soon as they are created, but most purchasers of notes require some seasoning as evidence that the payor intends to make the payments on time. The payor’s credit history plays a crucial role not only in the viability of the note but also the purchase price offered. Buyers are likely to offer more for quality notes than they would for notes where the payor has a less than stellar credit history. It is always assumed that if the payor had a stellar credit history, he would have negotiated a mortgage through more traditional avenues.

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