Basic Rules for Writing Your Own Mortgage Note

Disclaimer: Medlow Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Knowledge of what will bring the highest selling price for a mortgage note that you create and is key to maximum profits when you sell.

Below we have created a list of key items to consider, as with all information the better you are informed the better the results will be.

Down Payment

The basic rule is the bigger the better. When you go to sell you note this will be a key factor to the buyer. The down payment is the equity that is created in the property. What does that mean as far as percentages go? The lower the down payment (Equity) the lower the resell value of the note. If your borrower puts down less than 10% the notes value on the secondary market will be lower as the risk to the buyer of the note is higher. You can probably sell the note, but the offers will be highly discounted. A decent down payment would be 10%-15%, a good down payment would be 15%-20%, great for 20%-30% and an excellent down would be over 30%. The better the down payment the higher the note value will be on the secondary market. All of them would sell depending on all of the loan characteristics but the rate will be higher on the larger down payment notes.

Loan Terms and Conditions

Let’s look at all the key factors that should be considered including Interest Rates, Structure and Length of Loan. When we compare a private loan to a conventional loan from banks you want to have your terms higher. Typically, owner financed loans are used because the bank loan does not work for the property. This can be from the banks underwriting requirement, selling price or buyers inability to qualify for the bank loan. A good rule of thumb would be 3%-7% higher than current bank rates. There is a risk in seller financing that warrants the higher rate. Currently a good rate would be between 10%-15%. This is also tied back to the size of the down payment and the buyers credit score. Again, the higher the interest rate the better the selling price of the note on the secondary market.

The best structure of the note should be a down payment with regular monthly payments for a fixed period at a specified interest rate. There are other structures such as interest only with a balloon payment of the principle, but they are riskier. With a large down and a good exit strategy for paying off the balloon payment they can be a good investment. If the buyer is relying on improving their credit rating to qualify in the future for refinancing to pay off the loan the value of the note on the secondary market will be lower. However, there are buyers that look for these opportunities as they are not bothered with facilitating a foreclosure. In the case of a balloon payment the state the property is in becomes part of the value equation. It is easier to stay away from these types of loans unless you are familiar with all of the rules of your state and the problems that could come down the road.

The easiest loans to sell are 5-10-year loans as the secondary buyer’s investment is shorter. When creating the note, you need to consider your requirement for cash flow and balance that out with the possibility of selling the note in the future. If you are good with the cash flow for ten years and may want to sell it after that then a 15-29-year note can be a good choice. If you do 15-30 year fully amortized loan it is saleable but at a higher discount. If you have collected payments and interest for 10 or 15 years already this discount is less relevant. The basic rule is the longer the term the bigger the discount as the buyer has a longer wait on their ROI.

Credit Rating of the Borrower

Secondary note buyers will be very interested the credit score of the original note buyer. These scores come from (Equifax, Trans union and Experian) sometimes referred as the Tri-Merger score. Let’s look at what these scores mean 600 or lower is Poor, 601-675 is decent, 676-720 is good, 720-780 is great and 780 or above is excellent. For example, if the Tri score is 660, 642, 601 note buyers would use 642 as the note pricing score. Most note buyers like to have that middle number above 600 but there are buyers that go as low as 525. The drawback is the note will be severely discounted. Try to stay above 625 and make sure you keep records of the buyer credit rating when they buy your property. If you are creating a note be patient and try to get that middle score to 720 or higher. It will get you a higher selling price if you sell your note in the future. Just because the buyer has a 720 score does not ensure that a bank will finance them. In addition to credit score bank look at DTI (Debt to Income) and LTV (Loan to value) as part of their underwriting criteria. It is very difficult for borrowers today to even qualify for bank loans which give property sellers opportunities to be the bank. There are other tax advantages for being the bank that you can discuss with your accountant. (Side note: if your accountant says it’s too difficult or risky then find a better accountant.)


Make sure you get copies of the borrower’s credit score and file these away for the day you sell the note. The original paperwork, contracts, documentation, appraisals, payment receipts and copies of all payment checks increase the value of the note when you go to sell it. You Will Need all these Documents to sell your note. You need original copies of all notes, escrow documents, contracts in your possession when the transaction is completed.

Record Keeping for Payments

If you are creating an owner financed note then you need to setup a set of folder to file the contracts in, file copies of payment check or bank statement showing the deposits of the payments in an orderly fashion. Secondary note buyers are looking for many items that help them value your note and make the highest offer possible. If you have shoddy records it will reduce secondary note value. Good records showing timely payment will increase the secondary note value. If the buyer is paying with money orders it would be wise to make a copy before you deposit it. Again, good paperwork increases the value of the note.

Seasoning the Loan

Seasoning the loan is showing how many (On Time) payments have been made on the note. Secondary note buyers vary on how many payments need to be made before they will buy a note. Typically, they are looking for 3-6 months as a minimum but depending on the down payment and the opportunity this can change. Most buyers will not buy an unseasoned note. In commercial notes the seller will need at least 3 or more payments collected on time. There are instances where this formality can be waived but the down payment would have to be over 40%.

Personal Guarantee

If the borrower is buying the property as a corporate entity (LLC, etc.) and not a private individual then a personal guarantee is required. Without this guarantee the value of the note on the secondary market could be reduced by thousands or tens of thousands of dollars. If a corporation defaults on a loan by dissolving the articles of the organization or incorporation without a personal guarantee in place there is no one that can be held accountable. With a personal guarantee the buyer who owns the entity is still liable for the debt. Require written personal guarantees when selling to an entity.

Closing Documents

Good quality documentation is key to buying and selling notes. If you do not have the expertise to do these documents yourself then use an attorney or title company to draw up the closing documents. These can include the deed, mortgage, a land contract or other agreements depending on which state you are buying the note in. The note must be recorded in the county where the property resides. If it is not recorded properly is cannot be sold to a buyer as is it not a legal debt. Hiring a title company or attorney will avoid legality problems with the assets status. The documentation needs to be correct and completed at a quality level that is acceptable to the state it is created or purchased in. Getting yourself (or your seller) informed properly on structuring a note for resale will be the difference between selling the note or not.

The better you are informed the greater the potential for successful transactions.

Notes: A secure investment without becoming the landlord

Today many investors are looking for more secure investments but don’t want the headaches that come with being a landlord and or property manager. Buying notes gives you the benefit of an investment that is backed by real estate and gives you the power of being the banker. This is a very powerful tool that with some understanding and options of investing from self-directed IRA’s gives you a solid opportunity to make nice returns on your money with the security of real estate.

Note Transaction Example

Disclaimer: Medlow Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Transaction Example

Let’s walk through a typical transaction to observe the profit potential, risks and recourse of buying a note secured by real estate and in this case a house.

  • A seller sells his house for $120,000 at 10% interest for 30 years and takes a $20,000 down payment.
  • Monthly payment is $877.57, and seller collects payments for 5 years
  • That leaves 300 payments on the note with a balance of $96,574,32
  • The owner wants to cash out and will sell the note to you for $83,332.39
  • This would give you a 12% return on your money.

The seller received:

  • $20,000 original deposit
  • $52,654.20 in payments for 5 years
  • $83,332.39 from you
  • $155,986.59 total for a house he sold for $120,000 (not bad)

You the buyer will receive:

  • $263,721 in total payments
  • $83,322.39 was your cost
  • $180,390.61 is your profit


How great is the risk? The value of the property is $120,000
Your investment to value (ITV) is 69% or you have $36,667.61 of equity in the property.
What are the risks?

You are earning 12% on an investment backed by real estate. If the payor fails to make the payments, you have the same rights that a bank has. You are the banker and can foreclose and take the property back. You can resell it for full price, sell it for cash or create another note. Once this note is seasoned for 6-8 months it can be sold off for cash. With notes you have the benefits of investments backed by real estate and none of the landlord headaches.

If you want an even lower risk, you can buy part of the note and not the whole note.

You can invest using funds from your Self-directed IRA or Roth IRA. This way the monthly payments and interest can be paid directly back into your IRA and be tax deferred or tax free depending on the type of IRA you have.

Before you start buying notes it is always best to do your research and learn as much as you can and follow those who have experience in these areas.

If you sell us a note, we will work with you to make sure the paperwork is correct so that your investment is protected. Let’s get some information from you and we can have a discussion and answers any additional questions you may have.