What Is A Mortgage Promissory Note?
If you’re looking to buy a home with the help of a mortgage, it’s easy to get overwhelmed by the process. Buying a house is likely the most complicated and expensive purchase you’ve ever made, and it might also be the first time you’ve hired an attorney to represent your legal interests.
But it’s not a good idea to proceed with such a big transaction without a good understanding of the fundamentals, because you’ll be the one responsible for the mortgage long after you’ve forgotten who your agent, attorney and lender were.
Let’s take a look at the document that will be with you for the life of your mortgage: the mortgage promissory note. In this article, we’ll explain what it is and why it’s important.
What Is A Promissory Note?: A Definition
Essentially, a mortgage promissory note is an agreement that promises that the money borrowed from a lender will be paid back by the borrower. The mortgage note also explains how the loan is to be repaid, including details about the monthly payment amount and length of time for repayment.
A mortgage promissory note (also called a home loan note, mortgage note or simply a note) is a type of promissory note – a promise in writing to repay the loan’s principal (i.e., the amount you’re trying to borrow to pay for the house you want to buy) plus interest, at a specified rate and length of time to fulfill the promise. It’s recorded along with a mortgage deed, which creates a lien on the property.
A mortgage note contains all the terms and conditions of the mortgage loan that will govern the repayment relationship between the borrower and lender. Any terms not contained in the note will not be considered in case of a dispute or mortgage default.
Some states use deeds of trust instead of mortgages. If you live in one of these states, you’ll receive that legal document instead of a mortgage note.
Information In The Mortgage Note
The note, to be valid, should clearly state the following information:
- The loan principal, or the amount being borrowed
- The amount of the borrower’s monthly mortgage payment
- Frequency of payments, whether monthly or bimonthly payments are expected
- Whether the mortgage is a fixed- or adjustable-rate mortgage
- What happens if payments are late or the borrower defaults
- If there’s a prepayment penalty
Mortgage Notes And Mortgages: What’s The Difference?
When people are talking about buying a house with a mortgage, they’re talking about getting the money to buy a house through a loan. Legally, though, “mortgage” refers to the security instrument that allows the bank to take and sell your house should you default on the mortgage.
Although the mortgage note provides the financial details of the loan’s repayment, such as the interest rate and method of payment, the mortgage itself specifies the procedure that will be followed if the borrower doesn’t repay the loan. For example, the mortgage loan explains that the lender can demand complete repayment if the loan goes into default or that the property can be sold if the buyer fails to repay the loan.
In the case of a home loan, the mortgage note is a private contract between the client and the lender, and the mortgage is filed in the regional government records office to create a mortgage lien on the home. Once you’ve paid off the loan, the lender will then record a document releasing the borrower from the liability of the mortgage or deed of trust and the promissory note.
What To Do If Your Mortgage Note Contains An Error
When you get to closing, you’ll be given a mortgage note to sign. Make sure to review this document carefully before signing. If there are any mistakes, or your understanding of the term differs from anything stated in the document, don’t sign it yet. You shouldn’t sign your note until your questions are resolved and any corrections are made to your satisfaction. In this situation, your closing might be postponed, but you may have avoided the stress of dealing with an unscrupulous lender.
Buying And Selling Mortgage Notes
It’s important to understand that the holder of your mortgage promissory note, typically the mortgage lender, can usually sell your mortgage note without first asking for your consent. Your current mortgage holder must only notify you about the change, and provide any information as to when the change will occur and where to make future payments.
In the likely event that your mortgage note can be sold to an investor, you’ll find this information in your Closing Disclosure. Just because your loan is sold doesn’t necessarily mean that your relationship with your lender ends. Your lender has the option of retaining the servicing rights, meaning they take your payment and maintain your escrow account. Record Mortgage® handles servicing on the majority of loans it closes.
Fannie Mae And Freddie Mac
Conforming loans are sold almost immediately to Fannie Mae or Freddie Mac. These are government-sponsored enterprises established by the federal government to keep mortgage lenders liquid so that they can continue offering home loans. Fannie Mae and Freddie Mac then securitize the mortgages and sell shares to investors on the secondary mortgage market.
Ginnie Mae is a government agency. Its mission is to purchase mortgage notes originated through the Federal Housing Administration (FHA), the Veterans Administration (VA) and the U.S. Department of Agriculture (USDA).
Private Mortgage Note Investors
Sometimes, home buyers can’t use a conforming loan or a government-backed loan to purchase a home because of conforming loan limits. In these cases, they need a jumbo loan, which is a type of non-conforming loan. Fannie and Freddie won’t buy these mortgage notes, but private investors will.
For mortgage and real estate investors, purchasing promissory notes through brokerages or as part of larger mortgage bundles (also referred to as mortgage-backed securities or MBS) can sometimes present a profitable opportunity. Although the details of your mortgage established in your mortgage note won’t change if the note is sold, the recipient of your monthly mortgage payments likely will. If this ends up being the case, it’s wise to double-check the status of your promissory note to ensure that it isn’t a case of mortgage fraud and that the ownership of the note has actually changed.
What Are Investors Buying When They Buy A Note?
When investors purchase a note, they also receive an assignment of the mortgage, the security interest in the property. That means that – just as with the lender who originated the mortgage, now referred to as the assignor – the buyer, now known as the assignee, can begin foreclosure proceedings should a homeowner default on their mortgage.
How To Obtain A Copy Of Your Mortgage Note
When you close on a property, you’ll receive a copy of your mortgage promissory note with the rest of your closing documents. If anything should happen to your copy – whether you misplace it or somehow it gets destroyed – you can request a new copy of the note from your lender, the registry of deeds, the county recorder’s office or your mortgage broker (if you worked with one). Again, if your mortgage note gets sold, the terms of the note will not change, but you should receive an updated copy of the note from the new owner.
The Bottom Line: The Mortgage Note Defines The Relationship Between Lenders And Homeowners
Mortgage promissory notes are important real estate documents that contain valuable information about a borrower’s obligations to their lender. For homeowners who want the most accurate sense of what the terms of their mortgage loan are, becoming familiar with the features of the mortgage note can be extremely useful. Understanding your mortgage note will help you make more informed financial decisions for your future.
Are you ready to take your first step on the path to homeownership? Apply for preapproval online today or give us a call at (833) 230-4553.