Investing in Mortgage Notes: A Beginner’s Guide

Investing in Mortgage Notes: A beginner's guide: MWMfund blog

What is a Mortgage Note?

Mortgage notes often offer higher-than-average returns for real estate investments. Investing in mortgage notes provides many benefits and presents unique opportunities to accredited and non-accredited investors alike. But what are these mortgage notes and how do you turn them into a reliable source of passive income?

What is a mortgage note

Let’s dive into the basics of mortgage notes.

Definition of Mortgage Notes

Homebuyers or investors who aren’t able to pay cash at closing apply for a loan. A portion of the purchase price is paid as a down payment, while the remaining amount is borrowed from a bank or credit institution. The lender offers the loan money in exchange for their sign on a promissory note and a mortgage.

Simply put, a mortgage note is a legal document that contains all the terms between the borrower and lender. This document outlines:

  • Amount of loan
  • Duration of loan
  • Interest rate
  • Payment due dates
  • Late fees and other penalties
  • Right to foreclose

Although a note may not be recorded in public records, it is a legally enforceable document.

It’s important to note a mortgage is a separate document that collateralizes the provided loan’s lender. It affirms the lender can take possession of the home/property if the borrower stops paying the loan interest. Furthermore, the note highlights the roles and responsibilities of the lender and the borrower. Also, a breach of contract and the property to which the mortgage is attached are determined.

Different Types of Mortgage Notes

Mortgage notes are categorized into four different factors – type, performance, lien position, and asset class.


  • Secured
  • Unsecured
  • Institutional loan
  • Private loan

When a loan is categorized as secured or collateralized, it means there’s a tangible asset tied to the loan (in the case of a mortgage, this asset is property). If the borrower stops paying the interest, the lender can take legal action and gain the asset title. However, if the loan is unsecured, there is no collateral on the loan.

Whereas, an institutional loan means a bank or lending institution has created the mortgage note. These loans are subject to strict laws and issuance guidelines, held to a higher standard than private loans. Such loans must comply with the Bureau of Consumer Financial Protection and Dodd-Frank Act regulations. A mortgage note created by a person – a family member, colleague, friend, private lender, or even home seller is a private loan. A private loan includes a note and mortgage; the underwriting process isn’t as heavily regulated.

Lien position

As a thumb rule, mortgages in the first position have the highest claim. Loans created after the first are known as second-position, third-position, and so on. A second lien is a subordinate mortgage note, that’s why second-position or junior-lien mortgage notes are a riskier investment.

Asset class

Mortgage notes are available on every type of real estate:

  • small multi-unit homes
  • single-family homes
  • townhomes
  • industrial buildings
  • apartment complexes
  • commercial strip malls

However, they are typically classified as residential or commercial real estate mortgage notes.

mortgage notes are available on every type of real estate: MWMfund Investing Tips

Loan performance

Their performance or previous payments categorize mortgage notes. This categorization of a mortgage note is by its performance or payment history. Hence, when a borrower pays the mortgage on time and doesn’t miss payments, the note is “performing”. But, if the payments have stopped, the mortgage note is in “default”.

A mortgage note can be classified as 30 days late, 60 days late, or 90+ days late. In other words, if the payment has not been made in the last 90 days, your loan is typically is classified as “non-performing.”

Why Buy Real Estate Mortgage Notes?

Mortgage notes provide both accredited and non-accredited investors with a chance to earn passive income. They offer:

Benefits of Mortgage Note Investing:

  1. Potential Double-Digit Returns – Rates of return are generally higher than most stock dividends and the bank’s traditional low yield bonds.
  2. Passive Income – Serves as an additional income for retirement, living expenses, or to build your savings account.
  3. IRA Friendly – Means to use self-directed traditional IRA or Roth IRA.  
  4. Rollover Option – Automatically rollover your investment to not miss out on earning interest or even future investment opportunities. 
  5. Little time or effort -doesn’t require the hassles of managing property and generally takes minutes to invest online.
  6. Impact & Income: Can help struggling families stay in their homes by creating affordable housing.
  7. Affordable: low minimum buy-ins, and doesn’t require the capital needed for property investments.  

How to Make Money with Mortgage Notes in 2021?

Investing in mortgage notes are one great way to invest in real estate. And certainly an easier option than managing a real estate property. However, it’s easier said than done, as mortgage note investments come with their own set of challenges. Identifying the right mortgage notes generating a steady passive income might be tricky. 

Reading this article will help you gain an understanding of the advantages of investing in mortgage notes. 

Investing in real estate or mortgage notes is buying real estate without property management or a landlord. Where the homeowner, instead of the bank, pays the lender. This lets you to collect a monthly payment, including both the interest and principal, when you purchase a mortgage note. In other words, it is a constant stream of revenue similar to what you would get from a rental property, except unlike a landlord, there is no need to manage the property.

Investing in Real Estate Mortgage Notes

Before going into the dynamics of mortgage notes, let’s define performing and non-performing notes.

  • A Non-Performing Note (NPN) is a note where the borrower does not pay as agreed. Non-performing loans include borrowers who are at least 30 days or more behind on their mortgage. 
  • A Performing Note is a mortgage loan in which the borrower pays his dues on time. Essentially, without missing any payments, the borrower has made and continues to make their mortgage payments.

Making Money on Performing Notes

You can often profit from the interest accrued in a performing real estate mortgage note. To clarify, interest is the rate a borrower pays the lender to borrow the funds for the property purchase. The higher the interest, the higher the borrowing cost and the more the lender earns. The lower the interest, the cheaper the borrowing rate, and the less the lender makes on the borrowed principal sum.

Any time mortgage payments are made to the loan, a portion is charged to the principal and interest (P&I). The largest portion of the monthly P&I going to the interest at the beginning of the loan, and the largest portion paying down the principal at the end of the loan. This helps lenders to receive the bulk of their interest before paying down the principal balance.

When you create a mortgage note or purchase a performing loan at face value, you’re earning from the interest you receive while you’re holding a loan. If you keep the loan to maturity, the interest rate on the loan is the return rate you will receive. However, if you buy a note at a discount of how much the principal is due, the return increases. Platforms, like Paperstac, make buying mortgage notes at a discounted price much easier to do.

Making Money on Non-Performing Note (NPN)

The chances of you getting a non-performing note at a discounted price are higher. Performing notes sell between 75 and 100 percent of their present value, and the sub-performing notes can be found at 50 to 80 percent of their present value.

With the discount they receive, some real estate investors prefer to concentrate exclusively on investing in non-performing notes. Often, non-performing loans are offered at a significant discount. This can range from a nominal value of 30 to 50 percent or more. The bigger the discount of non-performing notes, the higher the return. This discount gives the note investor the versatility to work with the borrower while still receiving a high return.

There are three ways for an investor to recoup their investment on non-performing real estate mortgage note:

  • Foreclosure 
  • Deed in lieu 
  • Modifying or adjustment of terms


When an investor buys a mortgage note, they are secured by the property. They have the right to take civil proceedings to obtain title to the property and recover the money owed to them. Eventually, the property will go to a public auction at a foreclosure sale where third-party bidders will bid on the property. If it sells at auction, the lender receives a part of the proceed from the sale. If it does not sell at auction to a third-party buyer, it becomes a real estate owned (REO) property, and the lender is responsible for the sale and preservation of the property as a way of recovering its investment. Foreclosure varies from state to state and can last from a few months to several years.

Deed in Lieu (DIL)

A Deed in Lieu (DIL) is an alternative to foreclosure, in which the lender still gains title to the property, and the borrower signs the deed to the lender in lieu of foreclosure. For homeowners who have little interest in preserving the home and potentially owe more than the home is worth, this can be a great choice, as it keeps a default from their credit history and helps them move on from their delinquency. When a DIL is executed, the borrower’s debt is absolved, and immune to any liens or encumbrances, the lender is placed on the title. For this purpose, the DIL is typically enforced by investors only when the title of the property is free of any other liens or encumbrances that might obstruct the investor’s ability to resell the property.

Modifying or Adjustment of Terms

For both the borrower and the lender, this is by far the most desirable choice. As it helps the homeowner stay in their home and the investors to gain cash passively without the hassle or cost of maintaining or selling the home. This is particularly feasible if the note is bought at a discount since the lender has more room to be flexible with the loan terms.

By lowering the interest rate, amortizing the loan out to 30 years based on the current balance, forgiving a portion of the balance, or adjusting the type of loan, the lender may negotiate with the borrower to reach a feasible monthly payment.

Where Can You Invest in Mortgage Notes?

There are many ways and sources to buy notes: including banks, crowdfunding sites, individual sellers, funds, online exchanges, and mortgage note online marketplaces like, Paperstac

However, many investors prefer investing in a fund, a more passive approach to investing in this asset class. This eliminates many of the difficulties associated with the active management of these assets. Also, this allows investors the chance to leverage the expertise of industry experts. 


Mortgage Note Investing

Investing in mortgage notes provides an opportunity to have a regular stream of passive income minus the hassles of managing a property. You can secure properties for less than their market value or buy mortgage notes and sell them later to another investor. One of the simplest ways to invest in mortgage notes is through a mortgage note fund, like MWMfund

Investing in Mortgage Notes with MWMfund

MWMfund is a Regulation A+ fund, “this means it has an exemption from the SEC to conduct business and raise money. The minimum investment amount is only $200 with the possibility to earn up to a 10% annual return. Focused on distressed debt in the mortgage note space, MWMfund’s goal is to help families modify their loans to get an affordable payment and avoid foreclosure. Operating with a double bottom line of profit and purpose. Most importantly, this is one great option for those interested in being a part of the movement, helping create affordable housing, and making money at the same time. 

impact investing with MWMfund: impact and income

What are the Benefits of Investing in a Mortgage Note Fund?

Here are the four advantages of using funds to invest in real estate mortgage notes:

benefits of investing in a mortgage note fund

Passive Investing

Mortgage note funds help investors generate passive income. Without all the hassle of being a landlord. Unlike other real estate investing options, these funds are much more hands-off investments. Not requiring you to take care of the active management tasks of the properties.

Investment Portfolio Diversification

Mortgage note investment funds offer investors a way to diversify their financial portfolio. 

Lower Initial Investment Threshold

Most real estate mortgage note funds generally are low initial investment thresholds. It’s typically not more than $200 to $300 to get started. Investors receive much lower entry points compared to buying individual properties. 

Sustainable Future Through Impact Mortgage Note Funds

How does investing in a mortgage note fund help create a more sustainable future?

Investing in mortgage notes with a mortgage note fund helps create a more sustainable future with impact investing and financial inclusion. A mortgage note fund can provide everyone a chance to build their wealth, not just the ultra wealthy and well connected. And by investing in mortgage notes you can help create affordable housing. Basically, you get a chance to profit from helping families stay in their homes, and avoid foreclosure. These are examples of how a mortgage note fund helps increase impact investing and financial inclusion.

It is important to note, access to affordable and responsible financial services continues to be a major challenge for low-income and financially excluded groups. Financial inclusion is helping to bridge this gap; which is why impact investing and mortgage note fund are an important part of the solution.When you understand social impact may be achieved without sacrificing financial returns as the new norm you see the value in companies that take this approach. In other word, impact investing through a mortgage note fund open to everyone allows investors the opportunity to participate in increasing financial inclusion; while earning competitive financial returns.

Mortgage notes: Profit and purpose with TJ Osterman, MWMfund Co-founder

Mortgage Note Funds – A Great Option for Investors

Ultimately, mortgage note funds offer broad exposure to real estate without much money. Allowing investors to passively participate in real estate investments. In other words, real estate funds are an ideal option for those just starting their real estate investing journey and for those more experienced ready to diversify their financial portfolio. As well as an opportunity for investors passionate about sustainability, impact investing, financial inclusion, and investing with companies that operate with a double bottom-line of profit and purpose.


To sum up, mortgage note investing is a wise way to start investing in real estate with relatively less work than the initial search and purchase. As well as an opportunity to invest for impact and income.

do you need help investing in a mortgage note fund?

Need help investing in a mortgage note fund? Reach out to us at or schedule a chat with TJ Osterman, MWMfund Co-founder, and CEO. 

Why Invest in mortgage notes with MWMfund

Click here to learn more about the future of the mortgage note investment industry. 

Also, check out: The MWMfund Learning Center for more educational content.

Build Your Wealth

Begin investing in an experienced, honest, and transparent fund. MWMfund is committed to making a difference in your wealth and in communities. Create an account in 4 minutes to enjoy a $200 minimum investment and low fees!

Share via
Copy link
Powered by Social Snap