What is a Mortgage Note?

what is a mortgage note

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

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
different types of mortgage notes

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.

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.  
Benefits of a mortgage note infographic

Where Can You Invest in Mortgage Notes?

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. 

mwmfund quote about mortgage notes

A mortgage note fund, like MWMfund, is one of the simplest ways to invest in mortgage notes. 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 and making money at the same time. 

invest for impact and income mwmfund

In Conclusion

Real estate mortgage notes provide an opportunity to allow you to have a regular stream of passive income minus the hassles of managing the property. You can secure properties for less than their market value or buy mortgage notes and sell them later to another investor. You can join the movement of investing with a double bottom line of profit and purpose with companies like MWMfund. We profit from helping families stay in their homes and help avoid foreclosures. Ultimately, real estate mortgage notes are a wise way to start investing in real estate with relatively less work than the initial search and purchase.

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

Need help investing in a mortgage note fund? Reach out to us at hello@mwmfund.com or schedule a chat with TJ Osterman, MWMfund Co-founder, and CEO. 
Also, check out: The MWMfund Learning Center for more educational content.

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