Core Private Mortgage Note Terminology Glossary
Promissory Note
The Promissory Note is the core legal document in a private mortgage transaction, representing the borrower’s written promise to repay a specific sum of money to the lender, along with agreed-upon interest, over a defined period. It outlines crucial terms such as the principal amount, interest rate, payment schedule, and default provisions. For note holders, this document is paramount as it legally establishes the debt and your right to receive payments. When engaging in private mortgage servicing, ensuring the Promissory Note is accurate, fully executed, and securely stored is essential for compliance and for streamlining any future enforcement actions or transfers of ownership. It’s the foundational evidence of the debt.
Mortgage
In many states, a Mortgage is a legal instrument that pledges real property as collateral for a loan, securing the Promissory Note. It creates a lien on the property, giving the lender the right to foreclose and sell the property if the borrower defaults on their loan obligations. Unlike the Promissory Note, which is the promise to pay, the Mortgage provides the specific property security. For private mortgage investors and servicers, understanding the specifics of the Mortgage document is critical for due diligence, risk assessment, and knowing your recourse options in case of non-payment. Proper record-keeping of the Mortgage, including its recording with the appropriate county, is vital for maintaining a secure and enforceable lien position.
Deed of Trust
The Deed of Trust serves a similar purpose to a Mortgage but involves three parties instead of two: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). The borrower transfers legal title to the trustee, who holds it in trust for the lender until the loan is repaid. If the borrower defaults, the trustee can initiate a non-judicial foreclosure (in states where permitted), which is often quicker and less costly than a judicial foreclosure process. For private mortgage lenders and servicers, understanding whether a Deed of Trust or Mortgage is used is crucial, as it dictates the foreclosure process and associated legal requirements. Accurate execution and recording are key to securing the lender’s interest.
Note Holder
The Note Holder is the individual or entity who legally owns the Promissory Note and, therefore, has the right to receive payments from the borrower. This is the ultimate creditor in a private mortgage transaction. The original lender may be the Note Holder, or they may have sold the note to an investor, who then becomes the new Note Holder. For private mortgage servicing, identifying the current Note Holder is paramount, as all communications, payments, and legal actions must align with their ownership. Proper documentation of note transfers (assignments) is critical for compliance and to ensure the servicer is acting on behalf of the rightful owner, preventing potential legal disputes.
Originator
The Originator is the initial lender or broker who first created and funded the private mortgage loan. They are responsible for underwriting the loan, preparing the loan documents, and disbursing the funds to the borrower. While the Originator might also be the initial Note Holder, they often sell the note to other investors in the secondary market. For private mortgage investors, understanding the Originator’s processes and due diligence standards is part of evaluating the quality and compliance of the note itself. For servicing, the Originator provides the initial set of loan documents and data, which are crucial for establishing the servicing file and ensuring a smooth transition to ongoing management.
Servicer
A Servicer is the company or individual responsible for managing the day-to-day operations of a mortgage loan on behalf of the Note Holder. This includes collecting payments, managing escrow accounts, sending borrower statements, handling customer inquiries, processing taxes and insurance, and initiating collection efforts if a borrower becomes delinquent. For private mortgage note holders, engaging a professional servicer streamlines administrative burdens, ensures regulatory compliance, and provides expert handling of borrower relations. A reliable servicer acts as an essential intermediary, protecting the investor’s interests and maintaining accurate, auditable records for all transactions.
Performing Note
A Performing Note refers to a private mortgage note where the borrower is consistently making timely payments according to the terms of the Promissory Note. These notes are considered low-risk assets and provide a predictable income stream for the Note Holder. For investors, performing notes are desirable for their stable cash flow and potential for long-term returns. From a servicing perspective, managing performing notes primarily involves routine payment processing, escrow management, and customer service. Maintaining clear communication and accurate record-keeping ensures compliance and a smooth experience for both the borrower and the Note Holder, minimizing the likelihood of future delinquencies.
Non-Performing Note
A Non-Performing Note (NPN) is a private mortgage note where the borrower has failed to make payments as agreed, typically for a sustained period (e.g., 90 days or more). These notes represent a higher risk but also potential for higher returns for investors who acquire them at a deep discount. Managing NPNs involves complex strategies such as loan modifications, workouts, foreclosure, or short sales. For note holders and servicers, accurately identifying and managing NPNs requires specialized expertise, diligent compliance with consumer protection laws, and clear documentation. Effective servicing strategies aim to mitigate losses and maximize recovery, often by exploring all possible avenues before resorting to foreclosure.
Discounted Note
A Discounted Note is a private mortgage note purchased by an investor for less than its current unpaid principal balance or face value. This occurs when the seller (often the original lender or another investor) wants to liquidate the asset quickly, or when the note carries higher risk, such as being non-performing. The discount provides a higher effective yield for the buyer. For private mortgage investors, acquiring discounted notes is a common strategy to increase potential profits. Understanding the true value and associated risks of a discounted note requires thorough due diligence, including assessing the property value, borrower’s payment history, and legal standing of the documents, all of which impact the servicing strategy and potential for return.
Face Value
The Face Value of a private mortgage note, also known as the original principal balance, is the total amount of money the borrower originally agreed to repay to the lender, excluding interest. It is the initial loan amount specified on the Promissory Note. Over time, as principal payments are made, the outstanding balance decreases, but the face value remains the same as the initial debt. For investors, understanding the face value is important when evaluating a note, especially in relation to the current unpaid principal balance and the purchase price. Accurate identification of the face value is crucial for all servicing calculations, including amortization schedules and interest accruals, ensuring compliance and transparency for the borrower.
Yield
Yield, in the context of private mortgage notes, refers to the actual rate of return an investor receives on their investment. It’s not simply the stated interest rate on the note but accounts for the purchase price (especially if it was discounted), the timing of payments, and any associated costs or fees. A higher yield means a better return. For private mortgage investors, calculating the projected yield is a critical part of due diligence before acquiring a note, helping them compare different investment opportunities. Servicing plays a direct role in realizing the projected yield by ensuring timely payment collection and efficient management of the loan, protecting the investor’s return.
Private Mortgage Note
A Private Mortgage Note is a debt instrument where a borrower makes regular payments to a private lender (an individual or a private entity, rather than a traditional bank or institutional lender). It is secured by real estate, typically through a Mortgage or Deed of Trust. These notes are often created in situations like seller financing, where the seller acts as the bank, or when investors purchase real estate and offer owner-financing. For private mortgage note investors and servicers, understanding the unique characteristics and regulatory landscape of private notes is essential. Proper servicing ensures compliance with state and federal laws that protect both borrower and investor in these less-regulated but often lucrative transactions.
Principal Balance
The Principal Balance, also known as the unpaid principal balance (UPB), is the remaining amount of the original loan that the borrower still owes, not including any accrued interest, late fees, or escrow amounts. With each scheduled payment, a portion goes towards reducing the principal, assuming the loan is fully amortizing. This balance is dynamic and constantly decreases as payments are made. For private mortgage note holders and servicers, accurately tracking the principal balance is fundamental for calculating interest, determining payoff amounts, and ensuring compliance with the loan’s amortization schedule. Maintaining precise records of the principal balance is critical for financial reporting and for any future sale or transfer of the note.
Interest Rate
The Interest Rate is the percentage charged by the lender to the borrower for the use of the principal loan amount. It’s typically expressed as an annual percentage and dictates how much additional money the borrower pays over the life of the loan. This rate is a key component in calculating the borrower’s monthly payment and the total cost of the loan. For private mortgage investors, the interest rate directly impacts the potential income generated by the note. Servicing involves accurately applying the stated interest rate to the principal balance, calculating monthly interest due, and ensuring adherence to regulatory guidelines regarding interest calculations and disclosures, particularly for adjustable-rate notes.
Lien
A Lien is a legal claim or right against a property that is used as collateral for a debt. In private mortgage transactions, the Mortgage or Deed of Trust creates a lien on the real estate, giving the lender a legal right to seize and sell the property if the borrower defaults on their loan. The lien ensures that the lender has a security interest in the property until the debt is fully repaid. For private mortgage investors, understanding the lien position (first lien, second lien, etc.) is crucial for assessing risk and potential recovery in case of foreclosure. Servicers must ensure the lien is properly recorded and maintained to protect the Note Holder’s interest and streamline any necessary enforcement actions.
We hope this glossary clarifies key terminology for your private mortgage note investments. To learn more about how we can simplify your private mortgage servicing, please visit NoteServicingCenter.com or contact Note Servicing Center directly to discuss your specific needs.
