Promissory Note
The written promise to repay a debt — the IOU that spells out the amount, interest rate, payment schedule, and terms of a loan.
A promissory note is the legal document in which one party promises to pay a specific sum of money to another, on agreed terms. In a real estate transaction, the promissory note is the debt itself — the borrower's written promise to repay — while a mortgage or deed of trust is the separate instrument that secures that promise with the property as collateral. When people talk about "selling a mortgage note," the asset being sold is, at its core, this promissory note plus the security instrument that backs it.
What's inside a promissory note
A well-drafted real estate promissory note specifies:
- Principal — the amount borrowed
- Interest rate — fixed or adjustable, and how it is calculated
- Payment amount and schedule — usually monthly principal and interest
- Maturity date — when the loan must be fully repaid, including any balloon payment
- Late fees, default terms, and acceleration — what happens if the borrower stops paying
- Prepayment terms — whether the borrower can pay early, and any penalty
Secured vs. unsecured
A promissory note can be secured or unsecured. A real estate note is secured: if the borrower defaults, the lender can foreclose on the property through the mortgage or deed of trust. An unsecured promissory note (a personal IOU with no collateral) is far riskier and worth much less, because recovery depends only on the borrower's general creditworthiness. Note buyers strongly prefer secured, recorded, first-lien notes.
Negotiability and transfer
Most real estate promissory notes are negotiable instruments, meaning they can be sold or transferred to a new holder. Transfer is typically accomplished by endorsing the note (often via an allonge) and assigning the security instrument of record. Proper endorsement and a recorded assignment are exactly what a note buyer's due diligence confirms — they prove the chain of ownership and the buyer's right to enforce the note.
Why it matters when you sell
The quality of the promissory note shapes its value. Clear terms, a documented payment history, a recorded first-lien security instrument, and a clean chain of title all make the note easier to underwrite and more valuable. Missing originals, ambiguous terms, or gaps in the assignment chain slow the sale and reduce the price. Keeping the original note and all related documents organized is the single best thing a note holder can do before selling.