What's a promissory note?

Question

Jeff Copeland · Answer

Actually, promissory notes can be secured or unsecured.

In terms of real estate (at least in the U.S. and particularly in lien theory States), the Promissory Note outlines the payment terms to the lender, while the mortgage pledges the home as collateral.

The two go hand in hand; but the promissory note is essentially the document where the borrower promises to pay X number of payments for X number of years at X percent interest. More details here.

Jeff Copeland · Answer

@Roy N. - I didn't mean to sound argumentative...hope it didn't read that way.

We are both correct. However, as you noted above, in this context (studying for his real estate license), Carlos needs to know what the document itself is and what it means in the context of a closing real estate transaction.

Every buyer at every closing of a financed real estate transaction in the U.S. will likely sign promissory note outlining their payment terms to their lender.

@Carlos Rodrigues - Here's an example of one from a hard money loan:

Roy N. · Answer

Technically @Jeff Copeland is correct - there is always a promise. Given your question was in the context of studying for your real estate licence, that would be the appropriate response.

Colloquially, secured loans are seldom referred to as promissory notes (at least here) - the pledge of security being given more weight than the promise.

Rich Baer · Answer

@Carlos Rodrigues

In simple terms, the note is evidence of a loan. If you don't pay the holder of the note starts a legal proceeding against the Maker which will end with either a foreclosure (secured by a property) or a legal judgment (unsecured).

Jeff Copeland · Answer

In the U.S., "mortgage notes" (consisting of both the mortgage and the promissory note, presumably) are sold to Fannie Mae, Freddie Mac, and other government-backed entities (in order to free up the banks' capital to turn around and make more loans, among other reasons), and these entities in turn package the notes in bulk and sell them as mortgage-backed securities on the secondary market. More on this here.

Some investors also buy and sell private mortgage notes. For example, if I owner-financed your house and you agreed to pay me $1000/mo for the next 20 years (total future value to me $240k, ignoring interest and the time-value of money), I might to sell the "note" I hold to another investor for $150k. The purchaser would essentially be paying $150k today in exchange for $1000/mo for the next 20 years, and their investment would be secured by your house.

Roy N. · Answer

A promissory note is simply a loan made on the borrowers word (promise) that s/he will repay according to the terms of the loan. There is no collateral pledged to secure the loan.

viz. A personal loan at your bank is a promissory note - you promise to repay. If you default, there are no assets pledged which the lender can readily sell or seize to recover their principal (as there is with a mortgage).

What's a promissory note?

What's a promissory note?

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