The Ultimate Glossary for Private Mortgage Notes

Seller Financing & Note Terminology Glossary

Seller Financing (Owner Financing)

Seller Financing, also known as Owner Financing, occurs when the seller of a property directly lends the buyer money for the purchase, instead of the buyer obtaining a loan from a traditional bank. The seller acts as the lender, and the buyer makes payments directly to the seller according to an agreed-upon schedule. This method creates a promissory note and often a security instrument (like a mortgage or deed of trust), which then requires ongoing management. For investors and lenders, understanding seller financing is key because it generates private mortgage notes that can be serviced, bought, or sold. Proper documentation and servicing are critical for compliance and to ensure timely payments.

Promissory Note

A Promissory Note is a legal document that serves as a borrower’s written promise to repay a specific sum of money to a lender, under agreed-upon terms. It outlines the principal amount, interest rate, payment schedule, maturity date, and details regarding default. Unlike a mortgage or deed of trust, the note itself is the evidence of the debt. For anyone involved in private mortgage servicing, the promissory note is the foundational document. Its clarity and accuracy are paramount, as it dictates all payment calculations, establishes the legal obligation, and is the primary instrument enforced in the event of default, streamlining compliance and paperwork management.

Mortgage

In real estate, a Mortgage is a legal instrument that pledges a property as collateral for a loan. It creates a lien on the property, giving the lender the right to foreclose if the borrower fails to make payments as agreed in the accompanying promissory note. Crucially, a mortgage is not the debt itself, but the security for the debt. For lenders and servicers, understanding the specifics of the mortgage document is vital for compliance with state-specific lien laws and for initiating any necessary collection or foreclosure actions. Proper recording of the mortgage ensures the lender’s lien priority and protects their interest in the property.

Deed of Trust

A Deed of Trust is a legal document used in many states as an alternative to a mortgage, serving the same purpose of securing a real estate loan. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). The borrower transfers legal title to the trustee, who holds it until the loan is paid in full. If the borrower defaults, the trustee can initiate a non-judicial foreclosure in many states, which can be a quicker process than a judicial foreclosure required by a mortgage. For servicers, understanding whether a loan is secured by a deed of trust impacts default management and legal compliance.

Land Contract (Contract for Deed)

A Land Contract, also known as a Contract for Deed, is a real estate transaction structure where the seller retains legal title to the property until the buyer completes all or most of the agreed-upon payments. The buyer takes possession and equitable title, making regular payments directly to the seller. Unlike a mortgage or deed of trust, there isn’t typically a third-party lender involved. For private mortgage servicers, land contracts require specialized attention as they differ in legal standing and compliance requirements from traditional notes and mortgages. Tracking payments and ensuring proper transfer of title upon completion are critical aspects of servicing these unique agreements.

Carryback Financing

Carryback Financing is a specific type of seller financing where the seller “carries back” a portion of the purchase price as a loan to the buyer. This typically occurs when a buyer cannot obtain full financing from a traditional lender or needs to bridge a gap between their down payment and a first mortgage. The seller accepts a promissory note and a security instrument (like a second mortgage) for the amount they’re financing. For investors and servicers, carryback notes represent a significant segment of the private mortgage market, requiring diligent servicing to manage payments, track interest accruals, and ensure compliance, particularly for junior liens.

Private Mortgage Servicing

Private Mortgage Servicing refers to the comprehensive management of loans held by private individuals or entities, rather than large institutional lenders. This includes collecting and processing payments, maintaining accurate payment records, issuing statements, managing escrow accounts for taxes and insurance, handling delinquencies, and ensuring compliance with federal and state regulations. For note holders, professional servicing streamlines paperwork, reduces the administrative burden, and provides an expert interface with the borrower, safeguarding their investment and ensuring that the loan remains compliant and properly administered throughout its term.

Note Holder (Payee/Lender)

The Note Holder, also referred to as the Payee or Lender, is the individual or entity who is owed the debt specified in the promissory note. This is the party who receives payments from the borrower and has the legal right to enforce the terms of the note and its associated security instrument (mortgage or deed of trust). For private mortgage servicing, clearly identifying the note holder is fundamental, as all funds are collected on their behalf and all communications regarding the loan’s status ultimately refer back to their ownership. Accurate record-keeping is vital for the note holder’s financial reporting and tax obligations.

Maker (Payor/Borrower)

The Maker, also known as the Payor or Borrower, is the individual or entity who has signed the promissory note and is legally obligated to repay the debt to the note holder. They are responsible for making scheduled payments of principal and interest, and for adhering to all other terms and conditions outlined in the note and security instrument. In private mortgage servicing, managing communications, payment processing, and default resolution with the Maker is the core function. Clear, compliant interaction with the Maker is essential to ensure smooth loan performance and to avoid misunderstandings that could lead to delinquency or legal issues.

Amortization

Amortization is the process of paying off a debt over time through regular, scheduled payments that gradually reduce the principal balance. Each payment typically consists of both principal and interest; early payments primarily cover interest, while later payments allocate more towards the principal. This systematic reduction ensures the loan is fully paid by the end of its term. For private mortgage servicing, correctly calculating and tracking amortization schedules is fundamental for generating accurate payment statements, reporting outstanding balances, and ensuring regulatory compliance, providing transparency for both the note holder and the borrower.

Balloon Payment

A Balloon Payment is a large, lump-sum payment due at the end of a loan term, after a series of smaller, regular payments. Loans with balloon payments are often structured with a longer amortization schedule (e.g., 30 years) but a shorter maturity date (e.g., 5-7 years), meaning the borrower’s regular payments don’t fully amortize the loan. For private mortgage servicing, tracking the balloon payment due date is critically important. Servicers must notify borrowers in advance, as per regulatory requirements, to ensure they have time to arrange for refinancing or sale of the property to cover the significant final payment, thus preventing unexpected defaults.

Escrow (for Taxes & Insurance)

Escrow, in the context of mortgage servicing, refers to an account held by the servicer into which the borrower makes regular payments for property taxes and homeowner’s insurance premiums. These funds are collected along with the principal and interest, and the servicer then disburses them to the appropriate taxing authorities and insurance companies when due. This mechanism ensures that the property’s taxes and insurance remain current, protecting both the borrower’s and the note holder’s investment. For compliance, servicers must meticulously manage escrow accounts, performing annual analyses and adhering to strict regulations regarding disclosures and disbursements.

Default

Default occurs when a borrower fails to meet the terms and conditions of their loan agreement, most commonly by missing scheduled payments. Other forms of default can include failure to pay property taxes or insurance, or violating other covenants within the promissory note or security instrument. When a loan goes into default, it triggers specific rights for the note holder as outlined in the loan documents, such as the ability to charge late fees, accelerate the loan, or initiate foreclosure. For private mortgage servicing, identifying and responding to default promptly and compliantly is crucial for mitigating losses and protecting the note holder’s investment.

Acceleration Clause

An Acceleration Clause is a provision in a promissory note or mortgage/deed of trust that allows the note holder to demand immediate repayment of the entire outstanding loan balance if the borrower defaults on certain terms, such as missing payments or failing to maintain property insurance. This clause bypasses the original amortization schedule, making the full amount due and payable at once. For private mortgage servicers, understanding and correctly applying the acceleration clause is a critical step in the default management process, initiating the legal path toward foreclosure if the borrower cannot cure the default and repay the accelerated balance.

Foreclosure

Foreclosure is the legal process by which a lender or note holder reclaims the property that was pledged as collateral for a loan, due to the borrower’s default. This process allows the note holder to sell the property to satisfy the outstanding debt. The specific procedures for foreclosure vary significantly by state, generally falling into two categories: judicial (requiring court action) or non-judicial (exercised through a power-of-sale clause in a deed of trust). For private mortgage servicing, navigating the complexities of foreclosure requires expert knowledge of state laws and rigorous adherence to compliance guidelines to ensure the process is legally sound and protects the note holder’s interests.