Three Documents You Must Have When Buying Notes

There are three critical documents you’ll want in hand when buying a note. They are a description of the note you bought, as well as proof that you now own it without dispute.

Since there is an almost infinite number of variations of these documents, I won’t show actual ones, but just describe what they’re for and what the critical components are. You can use this as a checklist when the seller provides them.

The first is a Receivable Purchase and Sale Agreement. It lists the buyer, the seller, the receivable (the note) and what has been agreed upon.

The first section the Agreement needs is a description of the Receivable itself. Look for these:

• Type of Security Instrument (Mortgage or Deed of Trust, depending on the state)
• Original Buyer
• Original Lender
• Date
• Recording Information
• Unpaid Balance
• Monthly Payments
• Interest Rate
• Number of Remaining Payments

There may be a section listing other documents requested by the buyer. These could include:

• Credit report on the payor of the note
• Recent appraisal, or other valuation of the property
• Insurance declaration page
• Pay history
• Preliminary title insurance commitment
• Original Note
• Assignment of the Mortgage
• Endorsement of the Note

There will be a section describing the purchase price and how it will be paid.

The Agreement I use has a section for Seller’s Warranties. This is where the note seller claims to be the true owner of the note. If the seller is a corporation, the board has agreed to the sale. They may state they have no knowledge of asbestos in the property. Read these carefully and ask questions if you’re not clear on what they mean.

The other two critical documents have already been listed, but they need to have their own page as well.

The Assignment of the Mortgage or Deed of Trust is the proof that you or your entity now have the ability to get the property through foreclosure if the borrower defaults on payments. This is the “security instrument” defined in the Purchase and Sale Agreement.

It will say something along the lines of, “The Assignor does hereby grant, sell, assign, transfer and convey all beneficial interest under that certain Mortgage described below….” My version goes on further, but you get the idea that the seller is transferring all his rights under the Mortgage to you.

You’ll probably see many of the following lines:

• Original Lender
• Borrower(s)
• Date
• Original Loan Amount
• Property Address
• Legal Description
• Recording Information

The Assignment must be signed and notarized.

The last document also transfers ownership, but of the note itself. This is called an Allonge to the Promissory Note, or sometimes simply the Allonge.

The Allonge is the shortest and simplest of the three. It simply lists:

• Loan Number
• Original Loan Amount
• Note Date
• Borrower(s)
• Property Address

Then it will say:

Assigned by (the Assignor)

Pay to the order of (you or your entity)

Critically, make sure it says WITHOUT RECOURSE. It will be signed by the seller but doesn’t need a notary.

In earlier times, the original note itself could be turned over and “Pay to the order of…” written on the back like you do with a check. The Allonge seems to be the preferred method now.

I wanted to save an exception of all this until the end. So far we have described a home sale via a note and mortgage or deed of trust. However, many of the notes we see are actually Land Contracts. This is a hybrid form that combines the promise to pay and the security agreement into one document. In this case the seller holds the deed until the obligation is paid off.

If you are buying a Land Contract, instead of getting an Assignment of Mortgage and an Allonge, you will get an Assignment of Seller’s Interest in the Land Contract. These may also be called a Contract for Sale or a Contract for Deed.

Once you have all these documents in hand you are the proud owner of the paper and can now record the appropriate documents in the county where the property is situated.