UPB stands for unpaid principal balance, the principal the payer still owes on the note. Purchase price is what a buyer pays to own that note, and the gap between the two is the discount. The balance is a fact you can verify from the payment record, while the price is a buyer’s judgment about risk and return.
Both numbers on one note
| Figure | Where it comes from | |
|---|---|---|
| Unpaid principal balance | $90,000 | The payment record: original amount less principal paid so far |
| Purchase price | $81,000 | The buyer’s required yield applied to the payments left |
| Discount | $9,000 | UPB minus price |
| Discount as a share of UPB | 10% | $9,000 divided by $90,000 |
| Price as a share of UPB | 90% | $81,000 divided by $90,000 |
Example with round figures, chosen to keep the arithmetic easy. It is no guide to what any particular note sells for.
The last row is what people mean when they quote a note in cents on the dollar: this one is priced at 90 cents for each dollar of UPB.
How the UPB is arrived at
UPB is arithmetic. Begin with the amount originally lent. Each payment first covers the interest due for the month, and the remainder reduces the principal. Subtract all the principal paid so far from the starting amount and the result is the UPB.
Only principal is counted. Accrued interest, late fees and money the holder has advanced for taxes or insurance are tracked separately, which is why the total owed on a note that has fallen behind can sit well above its UPB.
A buyer should rebuild the figure from the servicer’s payment history or the seller’s own records in place of taking it from a summary, and confirm it with the payer where that is possible. Notes we send to people who join the buyer list arrive with both figures and the worksheet behind the price, and the UPB on that sheet is still worth rebuilding for yourself.
How a buyer arrives at a price
The buyer’s starting point is the payments still to come. The question is what to pay today so that those payments produce the return the buyer requires, and that return is the yield.
Paying the full balance earns the buyer exactly the rate written on the note. A buyer who needs more than the note rate has to pay less than the balance for the same payments, and the shortfall is the discount. When you price a note as a buyer, that is the figure you are solving for: the wider the distance between the note rate and the required yield, and the longer the buyer waits to be repaid, the larger the discount grows.
Same balance, different price
Two notes with identical UPBs can sell far apart, because the yield a buyer asks for moves with the risk. It goes up, and the price comes down, with:
- a payer with a short or patchy payment record,
- little equity in the property,
- a second lien position,
- a property that is hard to value or resell,
- gaps in the documents.
It works in the other direction as well. A note whose rate is above what buyers currently require can sell close to its UPB.
Which number feeds which measure
| Measure | Built on | What it describes |
|---|---|---|
| Loan-to-value (LTV) | UPB divided by the property’s value | How heavily the property is borrowed against |
| Investment-to-value (ITV) | Your purchase price divided by the property’s value | How much of the property’s value your own money represents |
| Yield | Your purchase price | The return on the money you paid |
| Payoff | UPB | What the payer owes if the loan is refinanced or the property is sold |
If the property behind the example note were worth $150,000, the LTV would be 60% and the ITV 54%. Buyers watch investment-to-value more closely of the two, because it sets their own money against the property where LTV sets the payer’s debt against it. The payoff row is the reason an early payoff tends to favor the buyer of a discounted note: the payer settles the UPB, so the discount is collected sooner than the buyer planned.
Write both down first
On any note you look at, record the UPB and the price before anything else, add the property value, and work out LTV and ITV from them. Those four figures are the first entry in the purchase the investor guide follows through to closing. The seller is reading the same two numbers from the other chair, having learned what unpaid principal balance is as the amount they are owed.
Keep the pair together after you buy as well. Each payment lowers the UPB while the price you paid stays where it was, so your records need both: one for what the payer owes, the other for what you have in the note.
Related questions
Can the purchase price be higher than the UPB?
Yes. If the rate on the note is above the yield buyers currently require, a buyer may pay close to the balance or more than it. Paying more than the balance is called buying at a premium.
Does UPB include late fees and unpaid interest?
No. UPB is principal only. Interest that has built up, late fees and amounts the holder advanced for taxes or insurance are tracked separately and can be added to what the payer owes in total.
If the borrower pays off early, do I get the UPB or my purchase price?
The payer owes the balance on the note, so the payoff is based on the UPB plus any interest due. What you paid for the note does not affect what the payer owes.