Promissory Note
This is the borrower’s written promise to repay a specified sum of money to a lender under agreed-upon terms. It outlines the principal amount, interest rate, payment schedule, and maturity date. In private mortgage servicing, the Promissory Note is the fundamental legal instrument that dictates payment obligations and is crucial for calculating accurate payment schedules, enforcing terms, and demonstrating compliance with loan agreements. It’s the primary document a servicer manages and references for all financial transactions and reporting, ensuring clarity for both the note holder and the borrower, and streamlining paperwork for audits.
Mortgage (or Deed of Trust)
This legal document pledges a property as collateral for a loan, securing the Promissory Note. While a mortgage involves two parties (borrower, lender), a Deed of Trust involves three (borrower, lender, and a trustee who holds the title until the loan is paid). Both instruments grant the lender the right to foreclose on the property if the borrower defaults. For private mortgage servicing, managing the Mortgage or Deed of Trust is critical for maintaining proper lien position, ensuring collateral security, and understanding the legal framework for potential default resolution, streamlining the process of enforcing the note holder’s rights and ensuring compliance.
Seller Financing (Owner Financing)
This occurs when the seller of a property directly finances the purchase for the buyer, rather than the buyer obtaining a loan from a traditional bank. The seller acts as the lender, holding the mortgage or deed of trust. This arrangement can offer flexibility in terms and speed up transactions. From a servicing perspective, seller-financed notes require diligent management to ensure all payments are collected, proper escrow accounts are maintained for taxes and insurance, and regulatory compliance is met. Professional servicing helps streamline paperwork, protect the interests of both the seller-lender and the buyer, and manage the unique aspects of these loans.
Land Contract (Contract for Deed)
Also known as an installment land contract, this is an agreement where the seller retains legal title to the property until the buyer completes all agreed-upon payments. The buyer takes possession and equitable title, making payments directly to the seller. Unlike a traditional mortgage, the buyer doesn’t receive a deed until the contract is fully satisfied. Servicing a Land Contract involves tracking payments meticulously, ensuring proper accounting for principal and interest, and coordinating the transfer of the deed upon payoff, which is crucial for compliance, avoiding title disputes, and streamlining the final property transfer process.
Wrap-around Mortgage (Wrap)
A Wrap-around Mortgage is a form of secondary financing where a new, larger mortgage “wraps around” an existing mortgage, incorporating its balance. The buyer makes payments to the seller (the wrap lender), who then continues to make payments on the underlying existing mortgage. This can benefit buyers with limited down payments or credit. For servicing, managing a wrap-around mortgage is complex due to the multiple lien positions and payment flows. Accurate tracking of both the wrap loan and the underlying loan is essential to prevent defaults on the original mortgage and to ensure transparent accounting for all parties involved, simplifying compliance oversight.
Private Mortgage
A private mortgage refers to a loan secured by real estate that is funded by an individual, a private investment group, or a non-institutional entity, rather than a traditional bank or credit union. These loans are often used for unique situations, such as quick closings, properties that don’t qualify for conventional financing, or when a seller offers financing. Servicing private mortgages involves managing the specific terms agreed upon, which can vary significantly from standard loans. Expertise in this area ensures compliance with state-specific regulations, accurate payment processing, and streamlined communication between private lenders and borrowers, reducing administrative burdens.
Note Servicing
Note servicing encompasses the comprehensive management of a promissory note and its associated security instrument (like a mortgage or deed of trust) throughout its lifespan. This includes collecting payments, disbursing funds for taxes and insurance (escrow), sending payment reminders, handling late payments, managing defaults, and providing accurate financial statements to both the borrower and the note holder. Professional note servicing is vital for ensuring compliance with consumer protection laws, streamlining paperwork, maintaining accurate records, and safeguarding the financial interests of the lender, providing peace of mind and reducing administrative burden for investors and brokers.
Partial Purchase
In the context of note investing, a Partial Purchase refers to the acquisition of a portion of a payment stream from an existing promissory note, rather than buying the entire note. An investor might purchase a specific number of future payments or a set dollar amount. This strategy allows note holders to access immediate cash while retaining the remaining future payments. Servicing a partially purchased note requires precise accounting to differentiate between payments due to the initial note holder and the partial buyer, ensuring accurate distribution and compliance with the terms of the partial purchase agreement, simplifying complex payment allocations.
Full Purchase
A Full Purchase in note investing means an investor acquires the entire remaining payment stream and ownership rights of a promissory note from the original note holder. This typically involves assigning all rights, title, and interest in the note and its accompanying security instrument to the new investor. For private mortgage servicing, a full purchase simplifies the servicing process after the transfer, as there is a single note holder. It requires meticulous execution of assignment documents and a clear transfer of all loan-related data to ensure seamless transition and uninterrupted servicing for the borrower, thereby streamlining the legal and administrative process.
Escrow (for Taxes & Insurance)
Escrow, in the context of private mortgage servicing, refers to an account held by the servicer to collect and disburse funds for the borrower’s property taxes and hazard insurance premiums. Instead of the borrower paying these costs directly, a portion is added to their monthly mortgage payment and held in escrow until due. This helps ensure these critical obligations are met, protecting the collateral property. Professional servicing of escrow accounts involves accurate calculation, timely payment to third parties, and meticulous record-keeping, which is essential for compliance, preventing lapses in coverage or tax liens, and streamlining financial management.
Balloon Payment
A balloon payment is a large, lump-sum payment that is due at the end of a loan term, after a series of smaller, regular payments. Loans with balloon payments are often structured with a shorter repayment period than the amortization schedule suggests, resulting in a significant outstanding balance at maturity. In private mortgage servicing, managing balloon payments requires clear communication with borrowers as the due date approaches, ensuring they are aware of their obligation. Compliance dictates proper notice requirements, and efficient servicing helps borrowers prepare and prevents unexpected defaults, streamlining the final stages of the loan and reducing surprises.
Assignment of Mortgage
An Assignment of Mortgage is a legal document that formally transfers ownership of a mortgage (and the underlying promissory note) from one lender (assignor) to another (assignee). This is crucial when a private mortgage is sold to another investor or when the original lender transfers their interest. For private mortgage servicing, proper and timely execution of an Assignment of Mortgage is essential for establishing legal ownership, ensuring compliance with recording statutes, and notifying the borrower of the change. This process streamlines the transition of servicing responsibilities and maintains the legal integrity of the loan, protecting all parties.
Subordination Agreement
A Subordination Agreement is a legal document that alters the priority of liens on a property. It typically allows a junior lien holder to move up in priority, or a senior lien holder to agree to be subordinate to a new lien. For example, a seller-financed second mortgage might agree to subordinate to a new first mortgage when the borrower refinances. Servicing professionals must understand the implications of subordination agreements for compliance, ensuring that all parties acknowledge the revised lien positions. This document is critical in managing risk and legal standing for all note holders involved, streamlining complex multi-lien scenarios.
Due-on-Sale Clause
A Due-on-Sale clause is a provision in a mortgage or deed of trust that requires the borrower to repay the entire loan balance immediately if they sell or transfer ownership of the property. This clause prevents the new buyer from assuming the existing loan without the lender’s consent. For private mortgage servicing, monitoring for property transfers and enforcing a due-on-sale clause, if applicable, is important for protecting the lender’s interests. Clear communication and diligent property monitoring help ensure compliance with the loan terms and streamline the process of initiating a payoff or re-negotiation, reducing potential disputes.
Amortization Schedule
An Amortization Schedule is a table that details each periodic loan payment, showing how much is applied to principal and how much to interest, over the entire loan term. It illustrates how the loan balance is gradually reduced with each payment. For private mortgage servicing, generating and maintaining an accurate amortization schedule is fundamental. It ensures transparency for borrowers, facilitates precise financial reporting for lenders, and is a cornerstone for demonstrating compliance with loan terms and consumer protection laws, simplifying payment tracking and reconciliation for all stakeholders and streamlining audits.
We hope this glossary provides clear insights into the essential terminology of private mortgage and seller financing. Understanding these terms is crucial for effective management, compliance, and success in the private lending space. To learn more about how we can simplify your private mortgage servicing, visit NoteServicingCenter.com or contact Note Servicing Center directly to discuss your specific needs.
