Real Estate Promissory Note
A real estate promissory note documents a loan secured by real property — used in seller financing, private lending, and hard money loan situations. It works alongside a mortgage or deed of trust that creates the security interest in the property.
When to Use a Real Estate Note
Use when seller-financing a real estate sale or making a private loan secured by real property — the note documents the debt, while the mortgage or deed of trust secures it against the property.
What Makes This Type Different
How a Real Estate Note differs from the standard Promissory Note.
- Secured by real property through a companion mortgage or deed of trust
- Longer amortization periods (15–30 years typical for real estate)
- Due-on-sale clause prevents property transfer without lender consent
- Balloon payment provisions common in seller-financed transactions
Complete Guide: Real Estate Promissory Note
A real estate promissory note is the core debt instrument in a real property financing transaction, representing the borrower's unconditional written promise to repay a specified sum of money with interest, secured by a mortgage or deed of trust on real property. This note is distinct from—but inseparable from—the mortgage or deed of trust, which is the security instrument recorded against the property title. Together, the note and the mortgage create a secured real estate loan: the note is the borrower's personal promise to repay (creating personal liability) and the mortgage gives the lender the right to foreclose on the property if the borrower defaults (creating the security interest). The note travels with the debt; the mortgage travels with the property.
Real estate notes occupy a unique position in the broader debt markets. Unlike most promissory notes, real estate notes are routinely bought and sold in secondary markets—a lender who makes a private real estate loan may sell the note to an investor who then becomes the new noteholder and is owed the debt. This negotiability creates important legal considerations: the terms of the note must be clear and complete because subsequent purchasers will rely entirely on the note's terms; the note must comply with applicable federal and state requirements that affect its salability; and the borrower must be notified when the note is transferred so they know where to direct future payments. Real estate notes that do not meet secondary market standards may be difficult to sell, affecting the lender's liquidity.
The economic terms of a real estate promissory note vary widely based on the loan type. Purchase money notes—used to finance the acquisition of a property—are often structured with fixed rates, standard amortization, and a 15- or 30-year term. Hard money notes—short-term bridge loans made by private lenders on real property—typically carry higher interest rates (8%-15%), interest-only payments during the term, and balloon payments due within one to five years. Seller carry-back notes—where the seller extends financing to the buyer—may have negotiated terms that reflect the seller's equity position and the buyer's creditworthiness. Each structure requires a note tailored to its specific terms and risk profile.
Federal regulations impose disclosure requirements on many real estate loans that affect the content and structure of the promissory note. The Truth in Lending Act requires lenders who regularly extend consumer real estate credit to provide specific written disclosures before loan consummation, including the APR, finance charge, and total payments. RESPA governs the settlement process for many residential real estate loans. For non-institutional private lenders making occasional loans secured by real property, some federal requirements may not apply—but state laws may impose additional requirements. The Dodd-Frank Act's ability-to-repay rule applies to most residential mortgage credit extensions, regardless of whether the lender is institutional or private. Understanding the applicable regulatory framework is essential before executing a real estate promissory note.
How to Create a Real Estate Note: Step-by-Step
- 1
Specify the Property and Loan Purpose
Identify the real property securing the note by legal description—the same description that will appear in the mortgage or deed of trust. State the purpose of the loan: purchase of the property, refinancing of existing debt, cash-out refinancing, or construction financing. The loan purpose may affect which regulations apply and may be relevant to the borrower's tax treatment of the interest paid.
- 2
Define All Financial Terms with Precision
State the principal amount, the interest rate (fixed or adjustable—if adjustable, specify the index, margin, rate caps, and adjustment frequency), the payment amount, the payment due date, the application of payments (interest first, then principal), the amortization period, and the final maturity date. For balloon payment notes, clearly state the balloon amount and due date. For interest-only periods, define when amortization begins. For adjustable-rate notes, provide the calculation methodology for payment adjustments.
- 3
Include Due-on-Sale, Prepayment, and Transfer Provisions
Include a due-on-sale clause requiring full repayment of the note if the property is sold or transferred without the lender's consent—this protects the lender from having the loan assumed by an unknown buyer. Specify prepayment rights: can the borrower prepay without penalty? If there is a prepayment premium, specify the formula (yield maintenance, step-down premium, or fixed penalty). Address the lender's right to transfer the note and the borrower's right to notice of transfer.
- 4
Define Events of Default and Acceleration
Enumerate events that constitute defaults: missed payments after the grace period, failure to pay property taxes or insurance, waste or material damage to the property, unauthorized transfer of the property, insolvency, and other matters that impair the security. Include an acceleration clause allowing the lender to declare the entire balance immediately due upon default. For residential loans, federal and state law may require specific notice and cure periods before acceleration—incorporate these requirements into the default provisions.
- 5
Execute the Note Consistent with Recording Requirements
The promissory note itself is typically not recorded—only the mortgage or deed of trust is recorded. The note must be signed by the borrower (and any co-borrowers). The lender should retain the original signed note, as it is a negotiable instrument; the original must be produced to enforce the debt in court. Execute the mortgage or deed of trust simultaneously, have it notarized, and record it with the county recorder's office immediately after closing.
Key Legal Considerations
Holder in Due Course Doctrine and Note Transfers
A promissory note is a negotiable instrument under UCC Article 3, which means it can be transferred to a subsequent holder who may take it free of certain defenses. A "holder in due course" (HDC)—someone who takes the note in good faith, for value, and without notice of any defects or claims—can enforce the note even if the borrower has defenses against the original lender. This doctrine allows real estate notes to be freely traded in secondary markets, but it also means that borrowers may be unable to raise defenses against a secondary market purchaser that they could have raised against the originating lender. Federal mortgage servicing regulations require the borrower to be notified when their mortgage loan is transferred.
Foreclosure Procedures and Non-Judicial vs. Judicial Foreclosure
The enforcement of a real estate note upon default follows the foreclosure procedures applicable in the state where the property is located. States using deeds of trust allow non-judicial foreclosure (trustee sale) without a court proceeding—faster and less expensive for the lender. States using mortgages typically require judicial foreclosure—a court action that takes months or years. Some states allow both. The promissory note's default provisions should reference the security instrument's foreclosure rights and the applicable state law. Anti-deficiency statutes in some states limit or prohibit the lender's ability to seek a personal judgment against the borrower for any shortfall after foreclosure sale.
Ability-to-Repay Rule and Qualified Mortgage Standards
Under the Dodd-Frank Act's ability-to-repay rule, lenders extending residential mortgage credit must make a reasonable, good-faith determination that the borrower can repay the loan. This requirement applies to most residential mortgage lenders, including some private party lenders. Qualified Mortgage (QM) status provides a safe harbor from liability—loans meeting QM standards are presumed to comply with the ability-to-repay rule. Non-QM loans (such as those with balloon payments, negative amortization, or interest-only periods) face stricter regulatory scrutiny. Private party lenders should consult counsel about whether the ability-to-repay rule applies to their lending activity.
Usury and the Farm Loans Exception
Real estate loans are subject to state usury laws, but several important exceptions and exemptions exist. Most states have exemptions for loans secured by first mortgages on residential real property above a threshold amount. Some states exempt loans made by or to corporate entities. Federal law preempts state usury limits for certain federally chartered lenders. For private party real estate loans between individuals, the applicable usury limit is typically the state's general usury rate or the specific real estate loan exemption threshold. Confirm the applicable rate before setting the loan's interest rate.
Common Mistakes to Avoid
Separating the Note from the Mortgage and Losing One Document
The note and mortgage are interdependent documents—one creates the debt obligation, the other creates the security interest. Losing the original promissory note creates significant enforcement problems; some courts require the lost note to be recreated through an indemnity agreement. Keep the original note secure. For note holders who purchase notes in secondary markets, verify that the complete original note (with all endorsements) is transferred and retained.
Including Provisions That Violate State Due-Process Foreclosure Requirements
Real estate note provisions that purport to waive the borrower's right to notice before foreclosure, or that allow self-help remedies against real property (changing the locks, entering the property without a court order), are typically void and unenforceable. Foreclosure must follow the specific procedures prescribed by state law, regardless of what the note says. Include language consistent with applicable state law requirements, not provisions attempting to contract around them.
Not Including a Due-on-Sale Clause
Without a due-on-sale clause, the buyer of the property can assume the seller's existing note without lender approval—substituting a potentially less creditworthy borrower without the lender's consent. For most real estate lenders, this is unacceptable. Include a due-on-sale clause requiring payoff of the note or formal assumption approval before the property can be transferred.
Failing to Require Property Tax and Insurance Escrows
If the borrower fails to pay property taxes, a tax lien may be imposed on the property that takes priority over the mortgage—the government gets paid first. If the borrower lets insurance lapse and the property burns down, the lender's collateral is lost. Many real estate notes require monthly escrow payments collected with the mortgage payment to cover annual property taxes and insurance premiums. This ensures the lender knows these obligations are being met.
Structuring an Owner-Financed Sale Without Understanding the Dodd-Frank Implications
Sellers who finance buyer purchases through real estate promissory notes may be subject to Dodd-Frank's ability-to-repay and loan originator requirements if they are not exempt. Seller-financers who own fewer than three properties and sell only one per year to owner-occupants may qualify for the private seller exemption—but the exemption has specific conditions. Review the Dodd-Frank seller-financer exemption with a real estate attorney before structuring an owner-financed transaction.
Other Promissory Note Types
Not quite the right fit? Explore other variants.
With Interest
Loan with a stated annual interest rate
Interest-Free
Loan with no interest charged
Family Loan Note
Promissory note for a loan between family members
Business Loan Note
Promissory note for a business loan
Vehicle Loan Note
Promissory note for a vehicle loan
Standard Promissory Note
View all variants and the standard template
Frequently Asked Questions
Common questions about the Real Estate Note.
You Might Also Need
Documents commonly used alongside a Real Estate Note.
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