How to Buy Mortgage Notes in 2022 [5 Steps] · Distressed Pro

How to buy notesA step-by-step walkthrough of how to buy notes. veridical estate of the realm notes are the most popular notes for investing .
This guide to buying mortgage notes is a comprehensive resource designed to help investors navigate the note-buying procedure .
We refresh the guide regularly as we field questions from our subscribers, interview experts, and evolve with the global of veridical estate of the realm note induct .
Bookmark this page and check back frequently to stay up-to-date.

What are Mortgage Notes?

Definition of a Mortgage Note

A mortgage note is a borrower ’ mho written promise to maintain lender repayment terms. besides known as a promissory note or real estate notes, mortgage notes are legal documents, though lenders don ’ triiodothyronine normally file them as populace records .

The Different Types of Mortgage Notes

A mortgage promissory note is categorized by loan type, lend supplier, lien stead, performance, and asset class. Knowing the differences helps when it ’ sulfur prison term to buy lend notes .



When a palpable asset, like a property or a fomite, is tied to a spleen, it ’ second called a guarantee loan. A lender typically offers better pastime rates and increased outgo limits on fasten loans since they have legal rights to sell the asset if the borrower defaults on the eminence .


When a lender issues a lend without a tangible asset and bases approval on a borrower ’ south credit history entirely, it ’ randomness called an unbarred or signature loanword. unguaranteed loanword interest rates are higher, and citation score requirements are more rigid than asset-backed fasten loans .



Loans issued by secret organizations or individuals are called individual loans or individual money. A private money lend doesn ’ triiodothyronine constantly follow traditional lend guidelines and offers borrowers tractability in some cases. Investors may find private lenders with notes to sell, though the bribe opportunities are normally limited to one per private seller .


Loans issued by credit unions, banks, and other organizations in the loan-writing business are called institutional loans. institutional lenders follow hard-and-fast guidelines with minimal flexibility but issue a set of loans. note investors working with institutional lenders benefit from recurring note handiness, as opposed to the erstwhile private seller scenario .


Lien position, aka lien priority or lien seniority, is the order in which the debt is paid in the case of default option .
Debtors place liens ( legal claims ) on property to secure re-payment. Lien positions are established by orderliness of read filing date. normally, the mortgage lender holds the first priority, and other liens tied to the property hold junior positions .
typically investors focus their endow either on “ beginning military position ” or else on junior liens normally referred to as “ seconds. ”

What Happens to Lien Positions During Foreclosure

If a foreclosure happens, the more senior the spleen ( first placement ), the more probably you are to be paid off and recover your investment because liens are paid off in order .
The tradeoff in notice invest is that while you pay much less for junior liens ( frequently pennies on the dollar ), you don ’ thyroxine enjoy the like security as elder spleen investors or investors in the first lien position .


real estate of the realm asset classes categorize property types with similar attributes. note investors can buy a broad range of notes across asset classes, including :

  • Commercial
  • Multifamily
  • Residential
  • Construction

When you ’ re starting out in mortgage notice investing, the safest bring is to invest in asset classes with which you are already companion .


note investors, in addition to understanding spleen position and asset classes, need to evaluate loan operation. Loans may be classified as non-performing, under-performing, perform, and re-performing .

  • Non-performing note: A note that is 90 days or more past due.
  • Under-performing note: Borrower has a history of being periodically late with payments.
  •  Performing note: A note being repaid on time and according to terms. Investing in performing notes is sometimes referred to as “clipping coupons” because the investor typically enjoys modest returns paid back at regular intervals.
  •  Re-performing note: Borrower had missed payments, perhaps even went non-performing, but is now back on track. Sometimes these loans have been modified either by extended amortization, principal reduction, or interest rate reductions. One strategy note investors employ is to buy non-performing notes and get them re-performing and then selling the re-performing notes after seasoning (a period of on-time payments).

The biggest discounts for eminence investors normally come from non-performing notes, which are attractive to note investors for the exorbitant discounts and multiple passing strategies. Performing notes are the most secure and offer the note investor dependable monthly payments backed ( collateralized ) by real place .

What is the Difference Between a Mortgage and a Note?

A note refers to the promissory eminence, which is a sign agreement for the repayment of a lend .
A mortgage or a act of entrust is a legal instrument that pledges the real estate as collateral. The document besides spells out how the lender can recover their investment if the promissory eminence terms aren ’ metric ton met, typically by foreclosing on the real number estate of the realm .

What is the Difference between a Note and REO?

In the banking diligence, “ REO ” means “ Real Estate Owned ” and is short circuit for “ OREO, ” an acronym for “ other real Estate Owned. ” Lenders use the terminus as a line token on reports to track very estate acquired through the foreclosure process .
When a lender owns a note ( a loan ) on a place, they retain the newspaper or document and the rights and responsibilities it outlines .
When a borrower fails to pay for an stretch period, the loanword becomes “ non-performing. ” The lender may choose to exercise its right to foreclose on the property to recoup the lender ’ second investment .
When a lender forecloses on a property, the lender gains the right to sell the property at a foreclosure sale. however, until the deal process is complete, the borrower retains ownership of the place, while the bank owns the non-performing note .
REO Sale At the foreclosure sale, the lender may exercise its right to bid. Since the lender already has a mortgage note on the place, the bid isn ’ t made with modern money, but rather, the lender makes what ’ south called a credit bid .
The lender can bid a maximal of the total measure owed on the property, including the unpaid principal balance ( UPB ) plus any default interest and foreclosure costs, up to the sum that makes the lender “ whole, ” meaning they have recovered all of what they ’ ve invested and any extra interest and penalties accrued .
The lender is not required to make the maximum invite, or any offer for that matter, american samoa long as the foreclosure sale is defendable as commercially reasonable ( another topic for another day ) or, in early words, fair .
If the lender ’ s credit offer is the highest at the auction, the lender repossesses the property at the foreclosure sale. At this point, the loanword is extinguished, and now the lender owns the real estate. Lenders then log the real estate as OREO, or as it ’ randomness normally called, REO .

What is the Difference between Real Estate Investing and Note Investing?

When investing in notes, you ’ re buy the debt secured by a nibble of property, the promise of repayment, and ( by and large ) the right to foreclose and recoup your investment if the borrower fails to meet obligations or make payments. You just don ’ triiodothyronine own the physical very estate .
real estate of the realm investors gain wax entree to a place when they purchase it. A note owner doesn ’ t have the rights to use or enter the property unless outlined in the lend agreement .
When you own a real estate notice, the payments you receive are fixed according to the bill. Vacancies, rend collection, or grocery store forces should not impact what ’ randomness owed .
Under normal circumstances, as the note investor, you are not responsible for collecting economic rent or dealing with “ tenants, toilets, and trash. ”
real estate investors are impacted when a place ’ second value goes down, tenants don ’ metric ton yield, or capital improvements are required. Note investing mitigates property-related losses .
On the somersault side, notice investors don ’ triiodothyronine benefit from property admiration. As a note investor, you trade the potential notional appreciation for set payments with a define schedule, interest rate, and condition .
When you invest in real estate, you have the mighty to undisturbed use of the property. If you ’ ve leased the property, you have the right to collect rents while your tenant has the right to “ lull enjoyment. ”
If you ’ ve borrowed money to buy the property, then in addition to your rights of use, you have obligations to pay your loan and maintain the property to prevent it from falling into disrepair .
As a veridical estate investor, you enjoy both the rewards of appreciation vitamin a well as the risks of price correction. If the property ’ s value goes up, all of the appreciation goes to the property owner, not the lender .
If the property ’ s value goes down, the note is unaffected, the total owed stays the same, and the same payments must be made regardless of occupancy, rent collection, and market forces .

Why Invest in Mortgage Notes?

Purchasing mortgage notes can be an excellent investment for person looking for passive income secured by real estate of the realm. As with any investment, you should amply understand what you ’ rhenium buying before you dive in .

Regular Monthly Income

When you buy a note, you become the bank. Buy a perform note, and you can expect payment on time by a credit-worthy borrower. You ’ ll get some of your money out plus a little bite of interest, and it ’ s all secured by that real estate, making it an attractive manner to invest in performing notes .

Capital Stack Security

The diverse levels of fiscal sources funding a property build the capital smokestack. equity is at the top, homeowner association ( HOA ) and maintenance fees are at the bottom, and first and second mortgages rank in priority between them .
When real estate prices correct and come down, the equity gets cut out first gear. mortgage holders maintain their position within the asset, but mortgage note investors aren ’ t impacted in this scenario. Note investors won ’ metric ton enjoy potential appreciation benefits, but the note investing remains dependable .

Property Investment : $ 100,000
Money Down : $ 20,000
Mortgage Balance : $ 80,000
Property Value After Market Correction : $ 70,000
What Happened?
The property owner lost $ 20,000 and is now deep in debt by $ 10,000, called a lack. The lender hasn ’ deoxythymidine monophosphate lost anything but retains foreclosure rights on the property. however, to recoup the insufficiency, a lender may wait until the market works in its party favor .
early factors to consider when evaluating whether buying a specific mortgage notice is a dependable investing admit :

  • The Seller – Sadly, there has been a scourge of hucksters and fly-by-nights who have sold a variety of bad assets with false promises. Make sure you’re dealing with a trustworthy seller.
  • The Property – Since the property is the collateral for the note you’re buying, you must have a reasonable understanding of the property’s value and the prospects of future value.
  • The Borrower – Although as a note investor, you have remedies for non-paying borrowers if your investment is concentrated in a single asset, you need to have reasonable assurance that the borrower is unlikely to damage or destroy your collateral.
  • The Market – Since the market, including the foreclosure laws and timelines for the municipality, may impact the value of the collateral or the costs to recoup your investment in the event of non-payment, you should be comfortable with and understand the market where your collateral sits. 

With properly aligned goals, education, and expectations, buying mortgage notes can be a great investment .

How Do Mortgage Notes Make Money?

Making money on a real estate of the realm note investing depends on the type of notes you buy and the skill strategy .


If you buy a do real estate note, you receive payments according to the payment schedule, term, and interest rate. You accept those payments while enjoying the security of having your payments backed by the real estate .


There are other ways to make money with actual estate notes. notice investors buying non-performing notes employ a variety of advanced strategies, including :

  • Loan to Own – Some investors will buy a non-performing note to exercise power to foreclose and take possession of the real estate.
  • Loan Modifications – Private investors often have more flexibility than institutional lenders in the options they can offer delinquent borrowers. Some investors buy a non-performing note at a discount to provide more favorable repayment terms to the borrower. The note is then re-established as performing, and the investor enjoys regular payments.
  • Selling Partials – The note investor sells payment portions to a third party for a margin above what was originally paid.
  • Selling Re-Performers – The note investor buys the non-performing note at a discount off the unpaid principal balance (UPB). Next, the investor works with the borrower to get the loan re-performing, and finally, the investor sells the now re-performing note to another investor at a markup.
  • Flipping or Brokering Notes – The highest value task in the note investing business is finding the note. You can profit from flipping notes, even if you don’t have money of your own, by finding real estate notes for investors who have the capital.
  • Foreclosure – It’s true. I had a client who bought a commercial property note for a pretty steep discount. Since the original lender, a community bank, had already begun the foreclosure proceedings, my investor client assumed the role of the foreclosing lender and hired us to market the asset for a foreclosure sale. The result was a profit of well over $300,000 in a matter of weeks, having sold the property at the foreclosure sale to a third party. My client never got in the chain of title and only owned the paper for about six weeks from start to finish.

I ’ meter sure we ’ ll listen from seasoned investors about extra ways to make money with real estate notes. If that ’ south you, let us know in the comments below .

What is the Risk of Investing in Mortgage Notes?

real estate note invest, when done right, should be LESS RISKY than veridical estate induct. Just as investing in bonds is considered safer than equities or stocks, the lapp is true for investing in real estate of the realm notes vs. investing in real estate .
As a note investor, you are trading the top potential of appreciation in central for limiting the downside risk. This international relations and security network ’ metric ton to say that there is “ no risk. ”
The come of gamble in a note investment depends on the lend cover, the Loan to Value ( LTV ), the military position ( elder, junior ) of the debt, the good religion of the borrower to some degree, the venue ’ mho regulative environment, and the quality of the documents, assignments, and allonges .
There is, of path, always risk in any investment, and as an investor, it is up to you to evaluate the risk for any investment you make .

How to Buy Mortgage Notes

When it comes to buying mortgage notes, there aren ’ t a batch of hard-and-fast rules about the process and how it ’ sulfur done. In fact, you can even buy notes with no money .
Buying a home is very standardize, while buying notes is reserved for investors. standard real estate transaction procedures and regulations don ’ thymine apply when buying the real estate of the realm ’ second mortgage bill .
A transaction ’ randomness participants largely determine the note-buying
process, so details will vary with each leverage. In the conclusion, you need documents that transfer lender rights to you .
ready to begin on the way to note ownership ? Use our simple, 5-step process. You ’ ll be buying mortgage notes in no time .

Step 1: Find Real Estate Notes to Buy

Finding real estate of the realm notes is easier when you know where to look. Your occupation strategy and experience determines where you should buy notes. Investors can buy mortgage notes online, build a lender network, or acquire notes from multiple sources, including :

  • Private note holders, usually seller-financed property or business sales
  • Hedge or private equity funds that buy in bulk from banks and servicers and then resell
  • Note exchanges and marketplaces
  • Special servicers
  • Banks and credit unions

Step 2: Note “Tapes”

A “ videotape ” is merely a spreadsheet with a bill ’ s lend numbers and early relevant information .
once you ’ ve received a magnetic tape, you ’ ll have the note details you need to start the due diligence process .

Step 3: Note Buying Due Diligence

mortgage note due diligence processes close correlative with the note buy scheme you ’ rhenium prosecute. In all cases, you ’ ll want to see a title report .
Buying a multi-million dollar “ lend to own ” single, small-balance commercial note on which you intend to promptly foreclose requires a very unlike due diligence summons than 100 non-performing junior liens that you ’ ra buy for six cents on the dollar and plan to “ rehab ” and change .
Want to shortcut the bill due diligence ? Contact our technical residential note evaluations partner, Craig Everett, who will do it for you. You ’ ra welcome .


LASER creator Pat Blount has been in the note business since the late ‘ 80s. He ’ mho flown around the nation to more than 2,000 banks and has sold many billions in non-performing notes. Pat put together the LASER organization in response to a Request for Proposal ( RFP ) from the FDIC for a note-evaluating system .
LASER is the Loan Acquisition Suitability and Evaluation Rating system. There ’ randomness a reason it ’ s called that and not the “ Loan Valuation System. ”


LASER asks you 25 or 30 questions about the eminence. You take the numbers of your ratings, and then use that calculate to decide if the acquisition is appropriate based on your desired returns and investment criteria .
You start with a strategy. then you ask a serial of questions to evaluate whether the note leverage will help you achieve your investment objectives .
This system is not the same as the eminence evaluation process ; the buyer and seller must establish prize in concert .
When you buy notes, you should evaluate three main components : the loanword, collateral, and seller criteria. Your strategy and the types of notes you ’ re buy will dictate the importance of each and the questions you ask .

Step 4: Making an Offer to Buy Notes

due diligence should besides be function of the “ Making an offer ” phase. sometimes you ’ ll get a tape first, evaluate it, and then make an offer on it. sometimes you ’ ll have to make an offer and then do your due diligence ; frequently it ’ sulfur both .
You should always have an lawyer involved in your bill purchase. We ’ re the property and note-buying experts, not attorneys. We ’ re not qualified to offer you legal advice, but we can decidedly shed light on how to buy notes from banks .


The bank will normally hire an lawyer for the bill sales process. If you ’ re involved in a transaction without a bank lawyer, it ’ s probably because you ’ ra buy the note ( south ) with a non-negotiable sign written and approved by the bank ’ randomness lawyer .
The exercise, or special assets, or secondary coil market director that you ’ re working with represents an organization worth between ten million and hundreds of millions ( possibly billions ) of dollars. These organizational reps aren ’ deoxythymidine monophosphate shooting from the pelvis on legally binding contracts .


Negotiating with banks to buy non-performing paper and brick-and-mortar assets doesn ’ t have to be daunting. Most bankers and mortgage lenders trade these assets every sidereal day .
The mechanics of these transactions are relatively square. Though dealing with any big fiscal institution can have its challenges .
normally these obstacles center approximately disconnected processes, inefficiency, and slow timelines. It ’ s a little like dealing with a politics agency. But the rewards can be great .


  • Deal directly with key decision makers
  • Build relationships with bank reps in charge of approving deals
  • Make the bank confident in your ability to perform and close on time
  • Demonstrate the benefits of your offer to both the institution and person that needs to sign off on it

don't over-complicate buying notes

How Much to Offer for Notes

current note values and personal preferences help determine the mighty total to offer for notes. Off-market notes can present great discounts and valuable investing opportunities thanks to less rival .


  • Down payment
  • Seasoning
  • Credit score
  • Number of payments left
  • Interest rate
  • How interest is calculated
  • Note lender type (private owner financed or institutionally originated)
  • Amount of installment payments
  • Future value
  • Loan type (balloon or fully amortizing)
  • Debt-to-income ratios
  • Maturity date
  • Status of performance
  • Value of the underlying real estate collateral
  • Local real estate market conditions
  • Alternative investment options

How to Make an Offer to Buy Notes


How the offer is made will depend on the seller ’ sulfur procedure and could involve diverse methods .

Bidding – Open or Sealed Bids

Banks that regularly sell notes to individual investors might employ structure offer processes. In this case, the forms, timeline, contingencies, and deposits are thoroughly spelled out and non-negotiable. This process puts bidders on a level bring field, and the bank can maintain a tauten expectation of terms and close timelines .

Letter Of Intent

A Letter Of Intent ( LOI ) gets negotiations started by outlining the terms, timelines, and contingencies for your buy. LOIs may include binders ( monetary deposits showing purpose ) .

Indicative Bid

An indicative bid is an crack to purchase with contingencies tied to due diligence factors. Once you place an indicative bid, you ’ ll reach access to the eminence ’ mho documents and deposit details. Most banks require bidders to sign a non-disclosure agreement ( NDA ) before releasing note records .

Offer to Purchase Leading to Purchase and Sale

In this summons version, you ’ d first present an offer ( or LOI or Indicative Bid ), which likely includes a binder and outlines a ascribable diligence period. The offer besides contains details about the more exhaustive Purchase and Sale agreement that you ’ ll complete before conclusion .


A binder is the money you put down upfront to prove that you ’ ra serious. Binders are typically entirely at risk if you violate one of the Purchase and Sale agreement terms. Required binder amounts vary, but 10 % of the leverage price is common .
A binder international relations and security network ’ thymine constantly required. sometimes you ’ ll get a barren spirit for a inadequate period and then be expected to go immediately to close without any offer or binder .


The due diligence period for buying notes is typically brusque. I ’ ve seen note deals close in vitamin a little as five days with minimal paperwork, and I ’ ve seen large commercial note deals drag out much longer than anyone wanted ( normally due to suspect paperwork, deed issues, etc. ), but you can expect somewhere between seven and 30 days soap. If you ’ re not able to perform in that kind of time frame, this might not be the commercial enterprise for you .


Binders and deposits should be held in escrow if you anticipate delays in your work and contract. reputable sellers will not ask you to blindly give them cash or a wire. A reputable seller understands that all of the parties in the transaction want to get what they came for and be comfortable with the march .
typically the seller ’ s lawyer or agent will hold escrow. There are times that you will make an offer to purchase notes and then immediately close with no escrow or binder .

Step 5: Closing Your Note

You ’ ve found notes to buy, evaluated them, and decided to make an offer. Your propose has been accepted, and it ’ s time to close and take possession of the eminence .
To close on your note, you ’ ll need to deliver the pillow of the funds. This typically happens by wire .
You besides need physical possession of the trace documents, including ( but not limited to ) :

  1. Copy of the mortgage or deed of trust, reflecting the same records on file with the county or municipality.
  2. The promissory note originally signed by the borrower: This document is the note that you’re buying! The “note” lays out all the terms of the debt and each party’s rights.
  3. The assignment: This document establishes you as the lender. Assignments should have borrower and seller signatures and are sometimes outlined in the note itself or as a standalone document. If the document is attached, it’s referred to as an allonge.
  4. The file: The file contains all note-related documents and communications. Bringing the file isn’t a requirement, and frankly, you probably won’t get it, but it is nice to have on hand during commercial note transactions. Don’t count on getting it. Do ask for it.

That’s it, now you’ve purchased a mortgage note!
After you close on the note, you ’ ll want to begin servicing .


eminence servicing is the action of handling and tracking payments a borrower makes on a note or loanword, so note investors don ’ t have to manage it. If you buy a acting note ( the borrower is making even payments ), or you can work with the borrower to get a non-performing note to a re-performing condition, consider hiring a note servicing company to collect and disperse funds each month.

Note Investing Success

mortgage eminence invest is an excellent way to boost your portfolio. With a short research and ace penetration from the distressed Pro team, you ’ ll have the resources and confidence to buy your first note. Check back with us for guide updates, or delve into the details with one of our spare educate webinars .
When it ’ mho time to find out how to sell your mortgage note rather, we can help. Our mortgage note-selling lead covers five ways to sell mortgage notes .
Whether you ’ re buy or sell, mortgage notes offer flexibility, security, and creative ways to profit. Have any bill investing tips or success stories ? Comment below – we ’ five hundred love to hear them !

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Category : Finance

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