--- title: "Mortgage Notes: Complete Investor Guide" description: "Mortgage notes are promissory notes and the mortgages or deeds of trust that secure them, bought by investors from banks, servicers, seller-financers and..." canonical: https://www.getswoopr.com/investments/mortgage-notes/ source: "Swoopr Investment: https://www.getswoopr.com" --- ## Direct Answer > Mortgage notes are promissory notes and the mortgages or deeds of trust that secure them, bought by investors from banks, servicers, seller-financers and other holders, so that the investor becomes the lender, collects the borrower's payments and holds the lien on the property. Performing notes trade near the unpaid balance for a yield of 6% to 10%; non-performing notes trade at deep discounts for investors who will modify the loan or foreclose; seller-financed notes are a large source of supply. An investor buys a note and its security instrument by assignment, recorded in the county where the property sits, and either services it through a licensed servicer or, for commercial and business-purpose loans, directly; the borrower's payments flow to the investor, who holds the lien until payoff, sale of the note or default. # Mortgage Notes: Complete Investor Guide ## What Is Mortgage Notes? Mortgage notes are promissory notes and the mortgages or deeds of trust that secure them, bought by investors from banks, servicers, seller-financers and other holders, so that the investor becomes the lender, collects the borrower's payments and holds the lien on the property. Performing notes trade near the unpaid balance for a yield of 6% to 10%; non-performing notes trade at deep discounts for investors who will modify the loan or foreclose; seller-financed notes are a large source of supply. | Item | Detail | | --- | --- | | Types | Performing (paying as agreed), sub-performing, non-performing; first and second liens; seller-financed and institutional | | Pricing | Performing first liens at 85% to 100% of balance; non-performing at 40% to 70% of property value or less; seconds at steep discounts | | Yield | The note's rate on the price paid, plus any discount captured at payoff; non-performing returns depend on the workout | | Servicing | A licensed servicer collects payments, escrows taxes and insurance and handles compliance; required in most states for consumer loans | | Regulation | Consumer mortgage notes fall under federal and state lending, servicing and foreclosure law (Dodd-Frank, RESPA, state licensing) | | Tax | Interest is ordinary income under Topic 403; a discount captured at payoff is also income; Publication 537 for seller-financed sales | ## How Does Mortgage Notes Work? An investor buys a note and its security instrument by assignment, recorded in the county where the property sits, and either services it through a licensed servicer or, for commercial and business-purpose loans, directly; the borrower's payments flow to the investor, who holds the lien until payoff, sale of the note or default. A performing note bought at a discount yields the note's rate on the lower price plus the discount at payoff; a non-performing note bought at a fraction of property value is worked out by contacting the borrower, modifying the loan into a performing one (the investor's preferred outcome, since a reperforming note can be sold near par), accepting a deed in lieu, or foreclosing under the state's judicial or non-judicial process, which takes months to years and costs legal fees. Seller-financed notes arise when a property seller takes back a note instead of cash and later sells it to an investor for a lump sum, usually at a discount that reflects the borrower's credit and the note's terms. IRS Topic 403 covers interest income and Publication 537 the seller's installment sale; the SEC's self-directed IRA alert names promissory notes among the assets used in fraud through retirement accounts. **Worked example.** An investor buys a performing seller-financed first lien with a $120,000 balance at 8%, paying $96,000, an 80% price. The borrower pays $10,560 a year, servicing costs $480, and the borrower refinances and pays the full balance after five years. The investor collects about $50,400 of net payments plus $120,000 at payoff on a $96,000 outlay, a total gain of about $74,400 and a yield near 13%, most of it ordinary income. Had the borrower stopped paying in year two, the investor would have owned a foreclosure process in a state where it takes eighteen months, at $8,000 to $15,000 in legal costs, against a property worth $150,000. The inputs are illustrative numbers, not market data. ## What Does Mortgage Notes Cost? The purchase price, including a broker's spread of 2% to 5% in brokered trades; due diligence (title search, property valuation, document review, borrower credit); servicing fees of $20 to $50 a month per loan; recording and assignment fees; legal fees for workouts and foreclosure of $3,000 to $15,000 or more; property preservation and taxes if the investor takes the property; and state licensing where required. ## How Is Mortgage Notes Taxed? Interest received is ordinary income under IRS Topic 403; a note bought at a discount produces additional income as the discount is recovered through payments or payoff, generally as market discount under Publication 550's rules; a non-performing note worked out or foreclosed produces gain or loss measured against the price paid; notes held in a self-directed IRA defer the income, with the SEC's alert on custodial risk applying; a seller financing their own sale reports under the installment method in Publication 537. ## What Are the Risks of Mortgage Notes? - Borrower default and the cost and delay of foreclosure, which varies by state from months to years. - Collateral: the property's value, condition and title, and senior liens or taxes ahead of the investor's position. - Compliance: consumer loans require licensed servicing and strict notice and modification procedures, with penalties for errors. - Fraud: forged notes, notes sold twice, and promissory-note schemes aimed at self-directed IRAs. **Common misconception.** Buying a mortgage note is not passive income with a lien for safety. It is becoming a lender, with the lender's duties (servicing, escrow, compliance, notices) and the lender's remedy (foreclosure, which takes time, money and in judicial states, years); the discount on a non-performing note is the price of that work and that uncertainty, and the investor who cannot do the work or hire it done has bought a legal process, not a yield. ## Where Does Mortgage Notes Fit? **Liquidity.** Fair for performing first liens, which trade among investors and funds at modest spreads; poor for non-performing and second liens; no organized market, and sale takes weeks of due diligence. **Who uses it.** Investors who can underwrite a borrower and a property, hire licensed servicing, understand their state's foreclosure process, and diversify across many notes; non-performing notes only for those with workout experience and legal budgets. **Portfolio role.** A credit holding in the fixed-income sleeve with the investor as the lender of record, sized by the capacity to handle defaults and counted as ordinary income. ## Frequently Asked Questions What is Mortgage Notes? Mortgage notes are promissory notes and the mortgages or deeds of trust that secure them, bought by investors from banks, servicers, seller-financers and other holders, so that the investor becomes the lender, collects the borrower's payments and holds the lien on the property. Performing notes trade near the unpaid balance for a yield of 6% to 10%; non-performing notes trade at deep discounts for investors who will modify the loan or foreclose; seller-financed notes are a large source of supply. An investor buys a note and its security instrument by assignment, recorded in the county where the property sits, and either services it through a licensed servicer or, for commercial and business-purpose loans, directly; the borrower's payments flow to the investor, who holds the lien until payoff, sale of the note or default. What are the risks of Mortgage Notes? Borrower default and the cost and delay of foreclosure, which varies by state from months to years. Collateral: the property's value, condition and title, and senior liens or taxes ahead of the investor's position. Buying a mortgage note is not passive income with a lien for safety. How liquid is Mortgage Notes? Fair for performing first liens, which trade among investors and funds at modest spreads; poor for non-performing and second liens; no organized market, and sale takes weeks of due diligence. Who typically invests in Mortgage Notes? Investors who can underwrite a borrower and a property, hire licensed servicing, understand their state's foreclosure process, and diversify across many notes; non-performing notes only for those with workout experience and legal budgets. What role does Mortgage Notes play in a portfolio? A credit holding in the fixed-income sleeve with the investor as the lender of record, sized by the capacity to handle defaults and counted as ordinary income. ## References - [IRS: Topic no. 403, Interest received](https://www.irs.gov/taxtopics/tc403) - [IRS: Publication 537, Installment Sales](https://www.irs.gov/publications/p537) - [IRS: Publication 550, Investment Income and Expenses](https://www.irs.gov/publications/p550) - [SEC: Investor Alert: Self-Directed IRAs and the Risk of Fraud](https://www.sec.gov/investor/alerts/sdira.pdf) S Swoopr Editorial Team The Swoopr Editorial Team produces independent investment education, research, and tools for understanding markets, evaluating opportunities, and managing risk. All content is educational only and does not constitute personalized investment advice. See our [editorial policy](https://www.getswoopr.com/legal/editorial-policy/) and [corrections policy](https://www.getswoopr.com/legal/corrections-policy/).