Most people are familiar with the term “promissory note” in relation to a mortgage or home loan. A promissory note is simply a document in which the borrower (promisor) agrees to pay back a loan to the lender (promisee). In a real estate transaction, what is a promissory note in real estate is usually secured by a mortgage or deed of trust.

While promissory notes are a common part of real estate transactions, there are a few things to keep in mind if you’re considering one. Here’s what you need to know about promissory notes in real estate transactions.

What Is a Promissory Note?

A promissory note is a legally binding document that obligates the borrower to repay a loan to the lender. Promissory notes are commonly used in real estate transactions, but can also be used for other types of loans, such as business loans or personal loans.

The promissory note will spell out the terms of the loan, including the interest rate, repayment schedule, and any collateral that is securing the loan. It’s important to note that promissory notes are not the same as mortgages or deeds of trust. A promissory note is simply the document that outlines the terms of the loan; the mortgage or deed of trust is what actually secures the loan.

Why Use a Promissory Note?

There are a few reasons why you might use a promissory note in a real estate transaction. First, promissory notes can be used to secure a loan from a private lender, such as a family member or friend.

If you’re considering a private loan, a promissory note can give the lender some peace of mind by spelling out the terms of the loan and providing some protection in case you default on the loan.

Another reason to use a promissory note is if you’re selling a property “subject to” an existing mortgage. In this case, the buyer would take over the payments on the existing mortgage, and the promissory note would be used to document this arrangement.

Finally, promissory notes can be used in a “wraparound” mortgage transaction. In a wraparound mortgage, the lender takes over an existing mortgage and “wraps” a new loan around it. The promissory note is used to document this new loan.

Things to Consider

If you’re considering using a promissory note in a real estate transaction, there are a few things to keep in mind. First, promissory notes are legally binding documents, so it’s important to make sure that you understand the terms of the loan before you sign anything.

If you’re not sure about something, be sure to ask questions or have a lawyer look over the document before you sign.

Second, promissory notes can be complex documents, so it’s important to make sure that the document is properly prepared by a qualified professional. This is especially important if you’re using a promissory note to secure a loan from a private lender.

Third, remember that a promissory note is not the same as a mortgage or deed of trust. If you’re using a promissory note to secure a loan, you’ll also need to sign a mortgage or deed of trust.

And finally, keep in mind that promissory notes can have a negative impact on your credit score, so if you’re considering using one, be sure to weigh the pros and cons carefully.

The Bottom Line

Promissory notes are a common part of real estate transactions, but there are a few things to keep in mind if you’re considering one. Promissory notes are legally binding documents, so it’s important to make sure that you understand the terms of the loan before you sign anything.

And remember, a promissory note is not the same as a mortgage or deed of trust. If you’re using a promissory note to secure a loan, you’ll also need to sign a mortgage or deed of trust.