These are the terms you will meet when you hold, sell or buy a private note, each defined in a sentence or two. They are grouped by subject, so reading a section through gives you the picture for that part of a deal.
Where a term has its own page, the entry links to it, and the longer guides are gathered in the learning center.
The people
The note holder is the person or company entitled to receive the payments. Paperwork may call the holder the payee or the lender, and on a seller-financed sale the holder is the seller. The payer, also written payor, makes the payments and may be called the borrower or the maker of the note.
The security document adds names of its own. In a mortgage the lender is the mortgagee and the borrower is the mortgagor. A deed of trust has a beneficiary (the lender), a trustor (the borrower) and a trustee, the neutral party that holds title as security.
A note buyer, or note investor, pays cash for a note and then collects the payments. A note broker takes a note to buyers on the holder’s behalf and is paid when a sale closes. A servicer is a company that collects payments, keeps the ledger and sends year-end statements for the note holder.
The documents
| Term | Meaning |
|---|---|
| Promissory note | The borrower’s signed promise to repay, stating the amount, rate, payment and dates. |
| Mortgage | A recorded document that pledges real estate as security for a note. |
| Deed of trust | A document that does the job of a mortgage through a trustee. The state decides which of the two is used. |
| Land contract | A sale in which the seller keeps the deed until the price is paid. Also called a contract for deed or an installment land contract. |
| Assignment | The recorded document that passes a mortgage or deed of trust from one holder to the next. |
| Endorsement and allonge | An endorsement is the signature that transfers the note itself. An allonge is a separate page attached to the note to carry that signature. |
| Collateral file | The original documents behind a note: the note, the recorded security instrument, any assignments and the title policy. |
| Title policy | Insurance that protects the lender if a defect in ownership or an earlier claim turns up. |
| Estoppel letter | A statement signed by the payer confirming the balance and terms of the note. |
The terms of a note
| Term | Meaning |
|---|---|
| Principal | The amount borrowed, leaving interest aside. |
| Interest rate | The yearly cost of the loan to the borrower, as a percentage of the balance. |
| Term | The length of the loan. The remaining term is how much of it is left. |
| Amortization | Paying a loan down through level payments, each covering interest and some principal. An amortization schedule lists every payment and the balance after it. |
| Balloon | A large final payment that falls due before level payments would have cleared the loan. |
| Interest-only | Describes a note whose payments cover the interest and leave the principal untouched. |
| Unpaid principal balance (UPB) | What the borrower still owes today, before any interest that has not yet come due. |
| Down payment | The cash the buyer paid at the sale, which is the borrower’s starting stake in the property. |
| Due-on-sale clause | A term that lets the lender demand full payment if the property is sold or transferred. |
| Prepayment penalty | A charge for paying the loan off early, where the note includes one. |
| Personal guarantee | An individual’s promise to pay if the borrower does not. It appears on business notes where the borrower is a company. |
Security and position
- Lien. A lien is a legal claim against property that secures a debt.
- Lien position. The order in which liens are paid when the property is sold, with a first lien paid ahead of a second.
- Secured and unsecured. A secured note is backed by property the holder can claim. An unsecured note is backed only by the borrower’s promise.
- Recording. Filing a document in the county land records, which gives public notice of it and fixes its place in line.
- Equity. What the property is worth, less everything owed against it.
- Loan-to-value, or LTV. The balance of the loan divided by the value of the property.
- Wraparound. A seller-financed note written on top of an existing loan that the seller keeps paying.
Pricing and selling
| Term | Meaning |
|---|---|
| Yield | What a buyer earns each year on the price they pay, stated as a percentage. |
| Discount | The gap between the balance owed and the price a buyer pays. |
| Present value | What a stream of future payments is worth as a single sum today, at a chosen yield. |
| Investment-to-value (ITV) | The buyer’s purchase price divided by the value of the property. It measures the buyer’s cushion. |
| Seasoning | How long the payer has been paying. A longer on-time record is stronger evidence. |
| Full sale | The sale of every remaining payment for one lump sum. |
| Partial | The sale of a set number of payments, after which the note returns to the holder. |
| Pricing worksheet | The page that shows how an offer was calculated: balance, yield, discount and fees. |
| Due diligence | The buyer’s checks before funding, covering title, property value, payment record and documents. |
| Broker price opinion (BPO) | A real estate agent’s written estimate of a property’s value, which a buyer may accept in place of a full appraisal. |
| Spread | The difference between what a buyer pays for a note and what the seller receives, when a broker is paid that way. |
Most of the terms in this table appear on the worksheet that comes back when you send us your note details, so it is the one to keep open while you read an offer.
Performance and default
| Term | Meaning |
|---|---|
| Performing note | A note on which payments are arriving as agreed. |
| Non-performing note | A note on which the payer has stopped paying or is far behind. |
| Re-performing note | A note that fell behind and is being paid again, sometimes under changed terms. |
| Default | A failure to do what the note requires. Missed payments are the plainest case, and lapsed insurance or unpaid property taxes can count too. |
| Grace period | The days after the due date before a payment is treated as late. |
| Foreclosure | The legal process by which a lender takes or sells the property after default. Judicial foreclosure runs through a court and non-judicial foreclosure runs outside one. |
| Forfeiture | The remedy under some land contracts, in which the buyer’s rights end after default. |
| Deed in lieu | The borrower hands the property back voluntarily to avoid foreclosure. |
| Loan modification | A written change to the terms of a note, agreed by holder and payer. |
The pricing terms on one set of figures
Here is an example with round figures. A note has an unpaid principal balance of $100,000 and is secured by a property worth $160,000, so the loan-to-value is 62.5%. A buyer pays $88,000 for every remaining payment. That is a full sale at a discount of $12,000, which is 12% of the balance, and the buyer’s investment-to-value is 55%.
Example only. What a buyer pays for an actual note turns on its terms, the payer’s record and the property.
To work out the same figures for your own note you need the unpaid balance, a recent idea of the property’s value and the price you have been offered. The balance divided by the value gives loan-to-value, the price divided by the value gives investment-to-value, and the balance less the price is the discount.
Related questions
What is the difference between a note and a mortgage?
The note is the promise to pay. The mortgage, or deed of trust, is the document that ties that promise to the property. You need both to have a secured real estate note.
What does UPB stand for?
Unpaid principal balance. It is what the borrower still owes today, not counting interest that has not yet come due. Buyers start their pricing from this figure.
Is LTV the same as ITV?
No. Loan-to-value compares the loan balance with the property value. Investment-to-value compares the price a note buyer pays with the property value, so it shows the buyer's cushion.