When you’re closing on a home that requires a mortgage, there are several relevant documents you need to sign to make it official. Among these documents are three main ones about the mortgage. The first is the “actual mortgage,” also known as the deed of trust—the document whereby you pledge your property as collateral against the loan. The second document, often confused with the deed of trust, is the mortgage note. It is the legal document by which you, as the borrower, agree to repay the mortgage by the agreed-upon terms. The lender will keep the original document while you will be given a copy for safekeeping.
Here’s the lowdown on what it is and why it is so important.
What is a mortgage note?What is a mortgage note?
A mortgage note is a promissory letter explicitly used in mortgage loans. Promissory notes are a part of every loan and are referred to as mortgage notes when used as part of a home loan. Mostly, it’s a glorified “IOU.” Included in it will be the specifics of the loan, such as:
- Rate of interest
- Terms of the loan
- Payment due dates
- Penalties and fees for not meeting the terms of the loan
As part of a home loan, you’ll be pledging the property as security for your borrowing money. If you can’t meet the loan terms by keeping up with regular payments, the lender has the right to file for foreclosure. If there are any disputes with your lender, the mortgage note will allow you to clarify any details. Thus, acting as a safeguard against unscrupulous lenders.
Considering this important document, you’ll want to make sure you store it in a very safe place. Keeping a digital copy is also recommended if the original is lost in a flood or fire. But even if it becomes lost, the lender will also have a copy. It’s also possible to get a copy from the company which services the loan (the company you get your billing statements from).
It is sometimes the same company that owns the loan but not always. That is because a mortgage note can be sold by your lender without your permission, with the only indication that it’s happened to be a change in the billing address.
You can sell notesYou can sell notes
This happens more times than you’d think, and it can even occur several times during the life of a loan. Mortgage notes are liquid assets that can be sold and converted into cash. Banks often bundle mortgages and sell them to investment companies for a lump sum through the secondary mortgage industry. Sales like this are common as they create “liquidity” in the market and allow lenders to make more mortgages by passing on yours.
But don’t let this worry you. The terms of your mortgage will remain the same. The new owner is required by law to ensure that the loan terms remain the same. All that changes for you is the address to which you’re sending payments. If you default on your mortgage loan, the current owner will be the one to file for foreclosure.
New York’s highest court, the New York Court of Appeals, holds that a lender seeking foreclosure on a property need only show possession of the mortgage note, not the mortgage itself. However, the court may require the production of the original mortgage note if a copy is contested. The case could be thrown out if the lender cannot produce the original.
The defendant (the person in foreclosure) can challenge the “chain of custody” of the mortgage note. This means that the lender must produce a chain of documents between themselves and the original lender to prove that they are the current one. Failure to produce the chain of custody can also result in the case being thrown out.
You can buy mortgage notes.You can buy mortgage notes.
The secondary mortgage industry isn’t closed to anyone outside banks or private lending companies. Investing in mortgage notes is available to everyone and provides an easy way into real estate investment without buying property. You can easily purchase mortgage notes through mortgage note brokerages (you can find hundreds online). They can even buy shares through real estate investment trusts.
However, their investment worth depends on the borrower keeping up with their payments. You’ll primarily be acting as a bank and have to assume the same responsibilities and risks that a bank does. If things look uncertain or need a quick cash infusion, you can always sell your investment to another buyer. Do plenty of research before trying an investment venture like this.