Learn the Lingo – Note Investing Terms

When first diving into the note industry world, it sure seems like folks are speaking a different language.

And this is coming from someone that grew up around it.

After working at the company from behind the scenes for several years, I have been taking a more hands-on approach the past few years (Hi – this is Mikayla, by the way). I’ve kept a running list of words that meant nothing to me the first time I heard them. So, I wanted to share them with you.

Whether you’re new to note investing or just like referencing a dictionary of note terms, let’s look at some note investing terms – broken into sections (because I love lists…)

Common Terms When Dealing with Real Estate Notes

Real Estate Note Document Terms

Contract for Deed – Also known as Land Contracts, the Contract for Deed (CFD) is an alternative method for documenting seller-financed notes. Unlike the more common Mortgage/Deed of Trust and Note setup, the Seller on the Contract for Deed remains the title holder until payments are fully made.

Deed of Trust – Used in non-judicial states (with quicker and less expensive foreclosure processes) along with the promissory note. A Deed of Trust establishes the lien position, the pledged asset/real estate, and the qualifiers for being able to foreclose.

Mortgage – Used in judicial states as the security in tandem with a promissory note. Like the Deed of Trust, the mortgage contains a lien position, states the pledged real estate/asset, and the right to foreclose if payments are not made.

Promissory Note – An “IOU.” The promissory note states what the payor/borrower owes to the seller and at what terms. It is the obligation to pay also known as a negotiable instrument.

Want to dive deeper into the documents? Check out our Detailing Documents article.

Creating Notes Terms

Face Rate – It’s another word for “Interest Rate.” It is the stated rate of interest on the promissory note that the borrower pays.

Note Holder – This is the individual(s) or entity that is receiving payments. The note holder has the legal right to collect and enforce the debt obligation.

P&I Payments – Stands for principal and interest payments, it is the monthly payment amount typical on a mortgage note. It does not include items like insurance or taxes (T&I payments).

Payor – The Payor, or Buyer/Borrower, is the individual(s) or entity making payments on the note.

Personal Guarantee – It’s possible to create a note where the payor is an entity instead of an individual. In that instance, it’s best practice to set up a personal guarantee. This makes an individual(s) personally responsible if the entity defaults and helps offset the challenge of assessing the entity’s creditworthiness.

Seller Financing – When a property owner agrees to sell their home directly to the buyer in installments. Rather than obtaining outside financing, the buyer pays the seller, similar to a loan but without the bank. The seller is also the creditor and receives interested-income on the created seller-financed note.

Servicing Company – A third-party company specializing in collecting payments and managing notes. In addition to collecting payments and keeping a verifiable payment history, servicing companies also keep a score of the current balance and track real estate taxes and insurance (if asked to do so).

Note Buying and Due Diligence Terms

Allonge – At its simplest, an allonge is an endorsement on a separate piece of paper attached to the original note. When investing in notes, an allonge allows for the transfer of note ownership along with the assignment.

Assignment – An assignment of the Mortgage or Deed of Trust transfers the lien rights against the real estate to the investor. It differs from an allonge, which transfers the rights to the note. Learn more about the role of allonges and assignments in our Detailing Documents article.

BPO (Broker Price Opinion) – A BPO is performed by a professional to help estimate a property’s value based on sales of comparable properties.

Discount – When purchasing notes, an investor purchases at a lower amount than the unpaid principal balance to achieve their desired yield. The difference between the purchase price and the note balance is the discount.

Due Diligence – It’s a process! A fancy word for homework, due diligence happens before closing and involves all the steps and research an investor performs to determine the value of the note. It includes a property evaluation, checking the paperwork, underwriting the borrowers, reviewing title, and more. Learn more about the process in our Due Diligence Master Class.

Hypothecation – When an asset is used as security for a loan without the sale or transfer of ownership. In the case of note investors, the investor would use an existing note they hold as security to obtain a new loan. They’d continue to receive payments on the existing note and make payments on the new note.

ITV (Investment to Value) – The ITV shows how much the note investor has invested in the note compared to the valuey. To calculate, divide the total invested by the property value.

Loss Mitigation – The process where a mortgage servicer works with a borrowers who is struggling to make payments avoid foreclosure by exploring options like loan modifications, forbearance, repayment plans, short sales or a deed-in-lieu of foreclosure. The goal is to minimize the loss to the note holder and help borrowers stay in their homes or exit the mortgage without going through the full foreclosure process.

LTV (Loan to Value) – The LTV shows investors how much the payor owes compared to the property’s value. To get the LTV percentage, you take all loans divided by the property’s value. The flip side of LTV is equity. The greater the equity, the more “skin in the game” reducing the likelihood of default.

Note Broker – Someone who finds a note for sale and takes it to a note buyer or investor. They do not purchase the note with their own funds and instead receive a fee for finding the note for the note buyer.

Note Seasoning – Also referred to as payment history, it’s the length of time the payor has been making payments. A note with a longer payment history is “seasoned.”

Partial Note Purchase – The sale of a note where the investor agrees to purchase the rights to a partial amount of the remaining payments (let’s say the next 144 out of the remaining 342). We love partials so much, we created an entire training dedicated to them!

Performance – Note performance answers the question, “are the borrowers making their payments as agreed?”

Performing Note – a note whose borrower has been making on-time, monthly payments without issues or late payments
Non-Performing Note – a note whose payer has missed payments (typically, a note is considered non-performing after 90 days of missed or late payments)
Re-Performing Note – a note that wasn’t performing but is now back on track. This one is a bit of a grey area.

Tape – A spreadsheet of mortgage notes offered for sale containing data points for evaluation. Notes may be offered for sale as a group (also known as a portfolio) or can be purchase individually (also known as cherry picking).

Yield – Yield is the return an investor receives over time based on the amount invested. For investors, they will purchase a note at a discount to generate a desired yield that is greater than the face rate of the note itself.

Gross Yield – Yield without considering the fees to acquire the note or the ongoing servicing fees.
Net Yield – Yield after calculating acquisition costs and servicing fees and including them in your spread.