Companies That Buy Mortgage Notes

Mortgage loans, as we know them today, date back to the 1930s, when FDR’s New Deal created the Federal Housing Administration, and with it, FHA-backed home loans.

But when strict FHA lending standards boxed some would-be home buyers out, many Americans turned to private mortgage notes instead — seller-backed financing that offered looser qualifying requirements and faster closing times, among other major benefits. As these private forms of financing took off, so did note buyers — companies that buy mortgage notes for long-term profit.

Key takeaways

By the end of this article you will know that:

1. Mortgage notes have become popular due to increasingly strict lending rules at established mortgage lenders.
2. Mortgage note holders sell their notes for cash if they no longer want to manage the loan or bear its risk, or need cash for new investments or costs such as health care, tuition or debt.
3. Note buyers will typically offer $0.70 to $0.90 on the dollar for mortgage notes; this margin is what incentivizes them to take on the risk and management of a mortgage.

What is a mortgage note?

A mortgage note, also known as a promissory note, is a legal document that outlines the terms of a loan used to purchase real estate. This document is signed by the borrower and provides detailed information about the loan agreement, including the loan amount, interest rate, payment schedule, and the duration of the loan. 

The mortgage note serves as a promise from the borrower to repay the borrowed amount, according to the agreed terms, to the lender. It legally binds the borrower to the commitment of repaying the loan. The note also specifies the consequences of failing to make timely payments, which can include foreclosure on the property used as collateral for the loan.

What are mortgage note buying companies?

Mortgage note buying companies specialize in purchasing mortgage notes from lenders or individual note holders. These companies typically operate in the secondary mortgage market and can provide liquidity to note sellers by offering a lump sum payment for the rights to future loan repayments. 

The rise of private mortgage notes

Private mortgage notes grew in popularity as FHA standards got more stringent. Not only did private mortgage notes allow previously shut-out buyers to purchase property, but they also made it easier for sellers to offload less marketable real estate — and fast.

To this day — and especially in our tight post-housing crisis lending environment — this type of seller-financing is still a popular option for buyers with less-than-perfect credit or sellers with less-than-ideal properties. And as private lending usage has increased, the number of investors — and eventually entire companies — that buy and sell promissory notes has grown as well.

Why sell my note?

Creating a private mortgage note is often a short-term solution for sellers. They’re either hoping to sell an unmarketable property, help a friend or family member gain entry to homeownership, or allow a non-traditional buyer to purchase a home. Whatever the reason, seller-financing gives them a quick and easy way to accomplish their goals.

Unfortunately, most sellers quickly realize that, though they wanted to sell their property, they did not want to manage payments or wait years (or even decades) to cash in on the home’s value, as seller-financing requires. Thus, they seek out a note buyer who can take the note — and its tedious management — off their hands for a quick cash offer.

Generally, mortgage note holders tend to sell their notes for one or more of these reasons:

1. They no longer want to bear the risk of the loan.

2. They no longer want to manage the payments or the buyer relationship.

3. They need extra cash flow to pay for additional real estate or investments.

4. They need funds to cover medical costs, college tuition or other expenses.

5. Their buyer is unwilling to refinance into a traditional loan product.

6. They want to pay down other high-interest debts using the note profits.

No matter their impetus, note holders can see fast, hassle-free financial gain from selling real estate notes to a qualified and knowledgeable buyer, as well as avoid the risk and tedium of managing a private loan.

Advantages of selling real estate notes

Selling mortgage notes, can offer several advantages for note holders looking to manage their financial portfolio effectively. Here are some of the  benefits:

• Immediate Liquidity: Selling a real estate note provides immediate cash, which can be used for various purposes such as paying off debts, investing in new opportunities, or handling unexpected expenses.
• Risk Reduction: Holding a real estate note involves certain risks, including the possibility of the borrower defaulting on the loan. Selling the note transfers this risk to the buyer, freeing the seller from the burden of managing and collecting the debt.
• Capitalizing on Market Conditions: The value of a real estate note can fluctuate based on interest rates and market conditions. Sellers might choose to sell their notes when market conditions are favorable to maximize their financial return.
• Tax Benefits: Depending on the original purchase price of the note and the price at which it is sold, the seller may realize a capital gain. Structuring the sale correctly can potentially offer tax advantages, such as installment sales, which spread out tax liability over several years.

Why companies buy notes

So, what’s in it for these companies that buy mortgage notes? As with any business, there’s profit to be gained from purchasing and selling private mortgage notes. Note buyers purchase private mortgage notes at a price that will allow them to make their money back — and then some — once the loan term is up or when the property or loan is re-sold. Note buyers, like any real estate investor, are looking for high-yield notes that offer a solid return on investment.

There’s also a low amount of risk in note buying. Real estate has a long-running reputation as a safe investment; plus, its physical property serves as collateral for any deal gone awry. The investor always has the option to sell the property on the open market and make his or her money back — or even more than that.

How to sell a note on real estate

If you’re looking for a company to buy your mortgage note, make sure to do some research first. While there are a number of note buyers on the market, not all of them are experienced in the space, and most of them only purchase very specific types of notes (and even then, for a fraction of what others will pay for them).

Look for a note buyer that has diverse experience, verifiable reviews/credentials, offers commitment-free (and cost-free) quotes and has customer service representatives available to answer questions, address your concerns and walk you through the process from start to finish.

If a note buyer ever makes you feel pressured or under-the-gun to take their offer, that is not a reputable company you want to be working with.

What is the value of a mortgage note?

A mortgage note’s value depends greatly on the terms that the seller and buyer agreed upon, as well as some financial factors. Typically, a note buyer will look at all of the following factors when determining a note’s overall worth:

1. The down payment the buyer initially put on the property

2. The buyer’s credit score and history

3. The structure of the loan (note buyers often steer clear of interest-only and balloon payment structures)

4. The length of the loan (5 to 10 years is ideal for most note buyers)

5. The loan’s interest rate

6. Any personal guarantees made on the loan

7. The buyer’s payment history on the loan — and the quality of the records tracking those payments

8. How many on-time payments have been collected to date

9. Details in the contracts and closing documents

Keep in mind, a note buyer doesn’t offer sellers the full worth or balance of their notes, as this would prevent any sort of long-term profit or ROI. In most cases, note buyers will offer between $0.70 and $0.90 on the dollar, depending on the above-mentioned factors. This is usually a cash offer which can be transferred or wired to the seller within a few days if not weeks.

Selling the note to the right buyer

Selling a mortgage note to the right buyer is crucial for several reasons and can significantly impact the overall satisfaction and financial outcome of the transaction. Here are some reasons why finding the right buyer matters:

• Expertise and Compliance: A reputable buyer will have a thorough understanding of the legal and financial intricacies involved in the purchase of mortgage notes. Their expertise helps in navigating any potential issues that may arise, thereby minimizing risks related to legal compliance and due diligence.
• Fair Pricing and Flexible Terms: Experienced buyers are likely to offer more flexible terms and better pricing structures, accommodating the specific needs of the seller. This can include tailored payment options or handling more complex scenarios such as notes with payment irregularities.
• Transaction Security: Working with a credible and well-established buyer enhances the security of the transaction. Established buyers are more likely to have robust processes in place for handling the transfer of funds and the necessary paperwork, reducing the likelihood of fraud or errors.
• Customer Service: The right buyer will typically provide a higher level of customer service, offering clear communication and support throughout the selling process. This is particularly important for sellers who are new to this process and require guidance at each step.

Finding the ideal note buyers

Below are some strategies to help you identify and select the right note buyers:

• Research Reputable Companies: Start by researching mortgage note buying companies. Look for those with strong reputations in the industry. Check reviews, testimonials, and ratings on platforms like the Better Business Bureau (BBB) or other financial review sites to gauge their credibility and customer satisfaction levels.
• Evaluate Financial Stability: A stable note buying company is more likely to fulfill all payment obligations without issues. Assess their track record, longevity in the business, and any public financial statements if available.
• Compare Offers: Don’t settle for the first offer. Contact multiple buyers and request quotes. This will not only help you understand the fair market value of your note but also give you leverage in negotiations.
• Understand the Terms: Carefully review the terms each buyer offers. Pay attention to details like the purchase price, fees, closing timeframes, and any contingencies they place on the sale. Understanding these terms will help you avoid potential pitfalls and find the offer that best suits your needs.
• Ask Questions: Prepare a list of questions to ask potential buyers. Inquire about their process, how they handle defaults, their expected timelines, and any other concerns you might have. A reputable buyer should be transparent and willing to address all your inquiries.

How to get the best value from your mortgage note

Here’s a guide to optimizing the value of your mortgage note:

• Ensure Timely Payments: A strong payment history is crucial to the value of your mortgage note. Ensure that payments are made consistently and on time. 
• Maintain Good Documentation: Documentation includes all original loan documents, payment histories, and any correspondence related to the mortgage. Well-organized documentation can expedite the review process for buyers and instills confidence in the transaction.
• Offer Competitive Interest Rates: The interest rate on your mortgage note significantly affects its attractiveness. Competitive rates that offer a good return relative to market conditions can make your note more desirable.
• Evaluate the Borrower’s Credit: Improving or ensuring the borrower’s credit score is favorable can enhance the note’s value. A borrower with a higher credit score poses less risk, which can increase the note’s market price.
• Increase Equity: Encourage early payments or additional payments on principal to increase the equity the borrower has in the property. Higher equity decreases the risk for the note buyer, potentially raising the note’s value.
• Understand Market Conditions: Be aware of current market interest rates and real estate market conditions. Selling your note when real estate markets are strong and interest rates are favorable can lead to better pricing.
• Professional Appraisal: Consider getting a professional appraisal of the property backing the mortgage. An appraisal that shows high value can positively influence the perceived safety of the investment, thereby enhancing the note’s attractiveness.
• Consider Partial Sales: If you do not need a lump sum immediately, consider selling only a portion of the note. This allows you to retain some income stream and possibly sell other parts of the note later, potentially at better rates.
• Market Your Note Effectively: Highlight the strengths of your note, such as reliable payments, good borrower credit, and property value. Proper marketing can make a significant difference in attracting the right buyers.

If you follow these steps, you can enhance the attractiveness and value of your mortgage note, securing the best possible deal when you decide to sell. Each step contributes to reducing the risk for the buyer and maximizing the return for you as the seller.

What do note buyers look for when buying mortgage notes?

When purchasing mortgage notes, buyers typically evaluate these factors:

• Payment history of the borrower
• Borrower’s creditworthiness
• Equity in the property
• Terms of the note
• Property type and condition
• Local real estate market conditions
• Legal standing and documentation
• Yield expectations

What happens after a mortgage note is sold?

After a mortgage note is sold, the borrower is formally notified of the sale of the mortgage note. This notification includes details about the new owner of the note and whom the borrower will make future payments to. 

Then, the legal document known as the assignment of the mortgage is recorded in public records. This document officially transfers the ownership of the mortgage from the original lender or note holder to the new buyer. This ensures that the new note holder’s interest is legally recognized.

If the entity servicing the loan (accepting payments, managing escrow accounts, handling customer service) changes, the borrower will receive a notification about where to send future payments. This might be managed by the note buyer or handled by a third-party servicer.

The loan’s servicing system is also updated to reflect the new ownership. All records are revised to direct future payments to the new note owner and to ensure that all payment history and account information is correctly aligned with the new note holder.

Meanwhile, the borrower continues to make payments according to the terms of the original mortgage note. The payment amount, interest rate, payment schedule, and other terms of the note remain unchanged unless renegotiated separately.

Are You Considering Selling-financing or Offloading Your Mortgage Note?

If you’re thinking of seller-financing a property to accomplish your investment goals, then make sure you structure your asset with a mortgage note buyer in mind. This will help you get top dollar when you’re ready to sell the note to a buyer or investor.

If you’re already considering selling your existing mortgage note to a note buyer, then learn more about the note buying process now or contact Amerinote Xchange today for an instant quote.