Real Estate

Promissory Note

A promissory note is the borrower's written promise to repay a loan, containing the loan terms including principal amount, interest rate, payment schedule, and maturity date. It is the "IOU" document that creates the debt obligation, separate from the mortgage or deed of trust that secures the loan with property.

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Exam Tip

Promissory note = the IOU, creates debt obligation. Mortgage/Deed of Trust = security instrument, creates lien. Note is NOT recorded; security instrument IS recorded. Maker = borrower, Payee = lender.

What is a Promissory Note?

A promissory note is a legal document in which the borrower makes an unconditional promise to repay a specific sum of money to the lender. It's essentially an "IOU" that creates the debt obligation in a real estate loan transaction.

Key Promissory Note Elements

ElementDescription
Principal AmountTotal amount borrowed
Interest RateAnnual percentage rate (fixed or adjustable)
Payment AmountMonthly payment due
Payment ScheduleWhen payments are due
Maturity DateWhen loan must be paid in full
Late Fee TermsPenalties for late payments
Prepayment TermsRights to pay off early
Default ProvisionsWhat constitutes default

Promissory Note vs. Mortgage vs. Deed of Trust

DocumentPurposeCreatesPartiesRecorded?
Promissory NoteBorrower's promise to payDebt obligationBorrower & LenderNO
MortgageSecures the loanLien on propertyMortgagor & MortgageeYES
Deed of TrustSecures the loanLien on propertyTrustor, Beneficiary & TrusteeYES

The Two-Document System

In real estate financing, two documents work together:

DocumentRoleAnalogy
Promissory NoteCreates the debtThe "IOU"
Mortgage/Deed of TrustSecures the debtThe "collateral agreement"

Promissory Note Terminology

TermDefinition
MakerThe borrower who signs the note
PayeeThe lender who receives payment
HolderCurrent owner of the note
Negotiable InstrumentNote that can be transferred

Mortgage vs. Deed of Trust States

Document TypeForeclosure ProcessParties Involved
Mortgage StatesJudicial (court process)Borrower (Mortgagor), Lender (Mortgagee)
Deed of Trust StatesNon-judicial (faster)Trustor (Borrower), Beneficiary (Lender), Trustee

What Happens to the Promissory Note

StageAction
At ClosingBorrower signs note; lender holds it
During LoanLender may sell or transfer note
At PayoffNote returned to borrower marked "Paid"
At DefaultNote used as evidence of debt

Negotiability of Promissory Notes

Promissory notes can be sold or transferred:

Transfer TypeDescription
AssignmentNote transferred to new holder
EndorsementSigned over like a check
Holder in Due CoursePurchaser who takes note in good faith

Important Note Provisions

ProvisionPurpose
Acceleration ClauseAllows lender to demand full balance upon default
Due-on-Sale ClauseRequires payoff if property is sold
Prepayment ClauseTerms for paying off early
Late Charge ProvisionPenalty for late payments

Exam Alert

Key exam points for Promissory Note:

  • The promissory note is the "IOU" - the borrower's promise to repay
  • Creates the DEBT obligation (not the security interest)
  • The Mortgage or Deed of Trust secures the note with property
  • Promissory notes are typically NOT recorded (security instrument is)
  • Maker = borrower; Payee = lender
  • Note contains: principal, interest rate, payments, maturity date
  • Note is negotiable - can be sold to another holder
  • Two documents needed: Note (debt) + Mortgage/Deed of Trust (security)

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