Can you easily locate the original promissory note?  This important legal document should be kept in a safe place, and here is why!

The note is a promise to pay or IOU from the buyer, spelling out the amount and terms of repayment. In legal jargon it is known as a negotiable instrument.  Similar to a check, the original must be presented to collect or prove ownership.

If the seller desires to sell and assign the note payments to an investor, the investor will ask for the original note to be provided at closing. The promissory note is then endorsed over to the investor.  Similar to endorsing a check, the following is written on the back of the note:

Pay to the order of, (Insert name of investor), without recourse.

                                                         (Seller Signs and Dates) 

Sometimes the note endorsement is executed on a separate piece of paper, also called an allonge. The allonge is then attached as a permanent rider to the original note. The endorsement enables the investor to prove they are a holder in due course, with the same rights of repayment as the original note holder.

An investor may also ask for the original recorded mortgage or deed of trust at closing.  However, if this original is lost, an investor will usually accept a certified copy from the county recorder’s office.

A lost original note, on the other hand, can cause a problem. In most states the note is not recorded. If the original note becomes lost a note investor may ask for a duplicate or replacement note to be signed by the payer or maker.  This means going back to the person that owes you money and asking them to resign.  This relies on their cooperation and can cause delays.

The investor will also ask for a lost note affidavit from the seller or note holder, stating the note has been lost and it will be presented if found at a later date.  Some investors will consider accepting just the lost note affidavit with a copy of the original note.

The best option is to avoid losing the note by keeping it in a safe deposit box or a fire and waterproof safe. Some sellers elect to have the original held by their attorney or a third party escrow servicing agent for safekeeping.  Whatever method you choose, be sure to keep the original note in a safe place that is easily located!

Keeping an accurate record of the payments received on the note shows how much the buyer still owes along with their payment habits.  Plus, note sellers can also improve the value of their note by providing a verifiable payment history to the investor!

There are two main ways to keep track of the payments.  The first and easiest is to let a professional handle it.  The payments are made to a third party servicing agent that keeps track of the balance and sends the money along to the seller.  They will also send out the annual 1098 Mortgage Interest Statements and can hold original documents in safe keeping.

If a seller chooses the “Do It Yourself”’ method over a third party pro they will need to follow these steps.

1. Place original note and other original documents in a safe deposit box.
2. Make a copy of each check or money ordered received (accepting cash is not recommended as the lack of paper trail makes it hard to verify).
3. Keep a copy of the bank record of deposit for the payments received
4. Create a ledger reflecting the date and amount of payments received
5. Calculate the amount applied to interest, principal, late fees (if any), and the resulting principal balance.  An amortization schedule or calculator can be helpful. Once calculated, record in the ledger.
6. Send out an annual statement to the buyer or payer along with the IRS1098 Mortgage Interest Statement.
7. Verify the real estate taxes and property insurance are being kept current.  Consider establishing a tax and insurance escrow wherein the buyer pays 1/12th of the annual amount into a reserve account each month.
8. Send collection letters as necessary for late payments.

When an investor agrees to purchase a note they will request a payment history.   A verifiable payment history can improve the value of a note as it provides proof of timely payments.  A payment history is considered verified when it is either provided by a third party or is backed up by the documents and records outlined.

Unfortunately many sellers fail to keep track of the payments received.  When they go to sell the note they try to recreate the history from memory.  Without any proof of payments received, an investor has to go on faith.   Sometimes a payment history affidavit can substitute for a payment record but it still doesn’t add the value of a verifiable proof.

Protect the value of the note by setting up a verifiable payment tracking method today!