Note Selling Glossary: Terms You Should Know

Understanding the language of note selling is the first step to making an informed decision. This glossary defines the key terms you'll come across, from the basics of a seller-financed note to the reasons why notes sell at a discount. Knowing what makes a note valuable is also key, so be sure to check out our guide on what makes a note valuable.

Amortization

The process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest, with the interest portion decreasing as you pay down the loan's principal balance.

ARV (After-Repair Value)

An estimate of a property's value after all necessary repairs and improvements have been completed. This figure is crucial for real estate investors and lenders to assess the potential profitability of a property.

Assignment

The legal transfer of a mortgage or deed of trust from one party (the assignor) to another (the assignee). When you sell your note, you are assigning your right to receive payments to the note buyer.

Balloon Payment

A large, lump-sum payment due at the end of a loan term. Balloon loans typically have lower monthly payments, but the borrower must be prepared to pay the full remaining balance at maturity.

Borrower/Payor

The person or entity who is legally obligated to make payments on a loan. In a seller-financed transaction, this is the buyer of the property.

Collateral

An asset that a borrower offers as security for a loan. In the case of a mortgage note, the collateral is the property itself. If the borrower defaults, the lender can seize the collateral.

Deed of Trust

A legal document that, in some states, serves the same purpose as a mortgage. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds the legal title to the property until the loan is repaid.

Default

The failure to meet the legal obligations of a loan, most often by failing to make payments as scheduled. Default can lead to serious consequences, including foreclosure.

Discount

The difference between the remaining principal balance of a note and the lower price at which it is sold. Note buyers purchase notes at a discount to achieve a higher yield and compensate for the risks involved.

Due-on-Sale Clause

A provision in a loan or promissory note that requires the borrower to pay the entire remaining balance of the loan if the property is sold or transferred.

Equity

The difference between the market value of a property and the amount of money still owed on its mortgage. It represents the owner's financial stake in the property.

Escrow

A legal arrangement in which a third party temporarily holds money or property until a particular condition has been met. In real estate, escrow is often used to hold funds for property taxes and insurance.

Face Value

The original amount of a loan, as stated on the promissory note. This is the amount the borrower initially agreed to repay, not including interest.

First Lien

The primary claim on a property, which takes precedence over all other liens. In the event of a foreclosure, the first lien holder is paid before any other creditors.

Foreclosure

The legal process by which a lender takes possession of a property after the borrower has defaulted on their mortgage. The lender can then sell the property to recover the outstanding loan balance.

Installment Sale

A sale of property where you receive at least one payment after the tax year of the sale. Seller financing is a type of installment sale, which can have tax advantages for the seller.

Interest Rate

The percentage of the principal of a loan that is charged as interest to the borrower, typically expressed as an annual rate. It represents the cost of borrowing money.

Lien

A legal claim against a property that serves as security for a debt. A mortgage is a type of lien. If the debt is not repaid, the creditor can seize the property.

LTV (Loan-to-Value Ratio)

A financial term used by lenders to express the ratio of a loan to the value of an asset purchased. A lower LTV indicates a larger down payment and less risk for the lender.

Maturity Date

The date on which the final payment of a loan is due. At this point, the loan should be fully paid off.

Mortgage

A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Non-Performing Note

A loan on which the borrower has stopped making payments for a significant period, typically 90 days or more. These notes are considered to be in default.

Note Buyer

An individual or company that purchases promissory notes, such as seller-financed mortgages, from the original note holders. Note buyers provide a way for sellers to receive a lump sum of cash instead of collecting payments over time.

Note Servicing

The administrative tasks associated with managing a loan, including collecting payments, handling escrow for taxes and insurance, and sending statements to the borrower. This is often handled by a third-party company.

Origination

The process of creating a new loan, from the application and underwriting to the closing and funding. When you create a seller-financed note, you are originating the loan.

Partial Purchase

A transaction where a note buyer purchases a portion of the future payments on a note, rather than the entire note. This allows the note seller to receive a smaller lump sum of cash while retaining a portion of the long-term income stream.

Payment History

A record of all the payments a borrower has made on a loan. A consistent, on-time payment history is a key factor in determining the value of a note.

Performing Note

A loan on which the borrower is current with their payments. These are considered low-risk investments for note buyers.

Present Value

The current worth of a future stream of payments, discounted at a certain rate of return. This is the fundamental concept behind how note buyers determine the purchase price of a note.

Principal Balance

The amount of money still owed on a loan, not including interest. Each payment on an amortized loan reduces the principal balance.

Promissory Note

A written, signed promise to pay a specific amount of money to a specific person or to the bearer of the note, either on demand or at a specified future date. This is the core legal document of a loan.

Seasoning

The length of time a borrower has been making payments on a loan. A well-seasoned note with a good payment history is more valuable to a note buyer.

Second Lien

A lien that is subordinate to a first lien. In the event of a foreclosure, the second lien holder is only paid after the first lien holder has been paid in full. This makes second liens riskier.

Security Instrument

A legal document that secures a loan with collateral. The most common types are a mortgage and a deed of trust. It gives the lender the right to foreclose on the property if the borrower defaults.

Seller Financing/Owner Financing

A real estate transaction in which the seller of the property provides the financing for the buyer. Instead of the buyer getting a loan from a bank, the seller "carries the note" and receives payments from the buyer over time.

Servicing Fee

A fee charged by a note servicer for managing the administrative tasks of a loan. This fee is typically a small percentage of the monthly payment.

Title Search

An examination of public records to determine the legal ownership of a property and to identify any liens or other claims on it. A clean title is essential for any real estate transaction.

Underwriting

The process that a lender or note buyer uses to assess the risk of a loan. This involves evaluating the borrower's creditworthiness, the value of the collateral, and the terms of the loan.

Yield

The return on an investment, expressed as a percentage. For a note buyer, the yield is determined by the purchase price, the interest rate of the note, and the remaining payment stream.