Finance Documents
Promissory Note in Real Estate Explained
The promissory note is the borrower's personal promise to repay a mortgage loan. It's often confused with the mortgage or deed of trust — but they serve different purposes and create different obligations.
Note vs. Mortgage: The Key Distinction
In real estate finance, two documents are always present in a mortgage transaction: the promissory note and the security instrument (mortgage or deed of trust). These are distinct documents with different purposes.
The promissory note is a personal promise by the borrower to repay the debt. It's not recorded in the public records. It specifies the loan amount, interest rate, payment schedule, and the consequences of default.
The mortgage (or deed of trust) is the security instrument that pledges the real property as collateral for the note. It IS recorded in the public records and creates the lender's lien on the property.
Key Terms
Promissory Note
A written promise to pay a specified sum of money at a specified time. The borrower's personal obligation to repay the loan. Not recorded.
Mortgage
The security instrument in a two-party mortgage state (lender and borrower). The borrower pledges property as collateral while retaining title. Recorded.
Deed of Trust
The security instrument in a three-party trust state (borrower, trustee, lender/beneficiary). The borrower transfers bare legal title to a trustee as security. Used in California, Texas, Virginia, and many other states.
Maker
The person who signs and is obligated under a promissory note. The borrower.
Payee
The party to whom the promissory note is payable. The lender.
Endorsement
The signing of the back of a promissory note to transfer it to a new payee. When lenders sell loans on the secondary market, the note is endorsed to the new owner.
Promissory Note FAQ
What happens to the promissory note when a mortgage is paid off?
The lender marks the note 'paid in full' and returns it to the borrower. The mortgage is then satisfied (cancelled) and a satisfaction of mortgage is recorded in the public records.
Can a lender sue on the note without foreclosing?
In some states, yes. A lender can pursue a personal judgment against the borrower on the note as well as foreclose on the property. Other states have anti-deficiency laws that limit this ability after foreclosure.
What is an acceleration clause?
An acceleration clause in the promissory note allows the lender to demand the entire loan balance immediately upon default. This triggers the foreclosure process.
What is an alienation (due-on-sale) clause?
An alienation clause (also called a due-on-sale clause) in the note or mortgage requires the full loan to be paid when the property is sold. It prevents assumption of the loan without lender consent.