Buying mortgage notes is one of the most misunderstood investment strategies in real estate. The internet is full of recycled advice, half-baked YouTube tutorials, and content written by people who have never closed a single note transaction.
This guide is different.
I’ve spent nearly two decades buying, brokering, analyzing, servicing, restructuring, settling, and selling residential mortgage notes, commercial paper, scratch-and-dent loans, and non-performing assets. I’ve worked with hedge funds, banks, credit unions, private lenders, DSCR lenders, and individual investors.
If you are a beginner entering the note business in 2025, this is the exact blueprint I wish someone handed me when I started.
This is the real playbook — not the YouTube version.
Let’s get into it.
✅ 1. What Is a Mortgage Note? (Beginner Breakdown)
A mortgage note is a legal instrument that represents:
-
the borrower’s promise to pay,
-
the terms of repayment,
-
and the lender’s right to enforce the debt.
It is paired with a mortgage or deed of trust, which secures the note with real property.
When you buy a mortgage note, you step into the lender’s shoes:
-
You collect payments.
-
You manage servicing.
-
You control the debt.
-
You control the collateral if the borrower defaults.
Types of Mortgage Notes You Can Buy
There are three core categories:
1. Performing Notes (PN)
Borrower is paying on time.
2. Non-Performing Notes (NPN)
Borrower is behind or in default.
3. Partials
You buy a piece of the cash flow (e.g., the next 60 months).
Each has unique risk, yield, and strategy — and beginners should know the difference in detail.
✅ 2. Why 2025 Is the Best Time in 15 Years to Start Note Investing
2025 is a perfect storm of opportunity:
1. Interest Rates Are Still Elevated
Higher rates = higher borrower strain = more delinquency.
2. Lenders Are Quietly Dumping Paper
Banks, credit unions, DSCR lenders, private lenders, hard-money shops — many are offloading:
-
scratch-and-dent loans
-
reperformers
-
non-performers
-
high-LTV assets
-
loans with thin documentation
Why?
Regulators are tightening reporting rules, and balance sheet pressure is real.
3. Data Tools Have Leveled the Playing Field
In 2012, only institutions had analytics, servicing notes, AVMs, predictive models.
In 2025, beginners have:
-
valuation tools
-
loan oversight dashboards
-
servicer integration
-
public lien databases
-
hazard & title checks
-
AI underwriting support
4. Real Estate Prices Are Normalizing
Not crashing — normalizing.
This creates new opportunities for:
-
discounted non-performers
-
low-LTV performers
-
borrower workouts
-
fast modifications
-
short payoff (SPO) deals
5. More Notes Are Trading Than Ever Before
Private lenders funded trillions during 2020–2023.
Those loans are now seasoning — and many are cracking.
Smart buyers prosper in markets like this.
✅ 3. Where Beginners Can Actually Buy Mortgage Notes (2025 List)
Most beginners have no clue where the real deal flow comes from.
Here’s the truth:
1. Direct from Private Lenders
This is the #1 source for:
-
reperforming loans
-
scratch-and-dent paper
-
DSCR rentals
-
fix-and-flip fallout
-
lightly delinquent notes
Private lenders are highly motivated sellers.
2. Hedge Funds & Debt Funds
Funds regularly sell:
-
one-offs
-
micro-pools
-
partial pools
-
NPN assets they no longer want to carry
-
old JV portfolios
They prefer buyers who perform.
3. Legitimate Note Brokers
True brokers add value:
-
organize collateral files
-
verify chain of assignments
-
clean up servicing commentary
-
provide payoff data
-
negotiate pricing
-
identify missing documentation
A real broker reduces your risk — not adds to it.
4. Note Exchanges
Useful but should be used with caution:
-
Paperstac
-
NotesDirect
-
LoanMLS
Always verify:
-
pay history
-
servicing notes
-
title
-
assignments
-
collateral file completeness
5. Direct Outreach to Non-Bank Lenders
This includes:
-
DSCR lenders
-
non-QM lenders
-
bridge lenders
-
construction lenders
-
fix-and-flip originators
Beginners rarely do this.
Professionals source their best deals this way.
✅ 4. The 9 Documents You MUST Review Before Buying a Note
Here’s where amateurs get wiped out.
Before buying any note — performing or non-performing — you must review:
-
Promissory Note
-
Mortgage/Deed of Trust
-
Payment History (Ledger)
-
Servicing Notes
-
Borrower Contact Log
-
Title Report / O&E Report
-
Collateral File (original docs + scans)
-
Chain of Assignments (AOM, ALONG, AOD)
-
Payoff Statement / Reinstatement Quote
If any of these are missing or inconsistent, you must adjust your price — or walk away.
✅ 5. Performing vs. Non-Performing Notes (Detailed Breakdown)
A. Performing Notes (PN)
Best for beginners.
Pros
-
Predictable monthly cash flow
-
Simpler management
-
Easier servicing
-
IRA-compatible
-
Low stress
Cons
-
Lower returns
-
Tight pricing
-
Smaller discounts
Typical Yield:
6%–12%
Best For:
New investors, retirement accounts, passive investors.
B. Non-Performing Notes (NPN)
More complex — higher return potential.
Pros
-
Deep discounts
-
Multiple exit strategies
-
High upside with reinstatement or modification
Cons
-
Legal timelines
-
Borrower communication challenges
-
Requires strong servicer + attorneys
Typical Yield:
15%–35%+
Best For:
Experienced investors or beginners with guidance.
C. Partials
Smart beginner strategy.
You buy part of the cash flow (for example, the next 60 months).
Pros
-
Lower risk
-
Flexible structure
-
Attractive yields
-
Seller retains residual value
Typical Yield:
8%–15%
Best For:
New investors wanting predictable returns with reduced exposure.
✅ 6. How to Value a Note (Real-World Formulas)
Forget what you’ve heard online.
Here are the actual underwriting formulas used by funds, banks, and institutional buyers.
A. Valuing a Performing Note
Factors Affecting PN Price:
-
Interest rate vs market rate
-
LTV (loan-to-value ratio)
-
Borrower credit trends
-
Payment seasoning
-
Collateral value (BPO/AVM)
-
State foreclosure timelines
-
Documentation completeness
B. Valuing a Non-Performing Note
You’re not just buying a debt —
you’re buying a timeline, a strategy, and an outcome probability.
✅ 7. Case Study #1 — Performing Note Valuation Example
Loan: $110,000
Rate: 7.99%
Pay History: 18 months, clean
Property Value: $240,000
Your Target Yield: 11%
Price: Approximately $96,000–$99,000
This yields long-term cash flow with low risk.
✅ 8. Case Study #2 — Non-Performing Note (NPN)
Collateral Value: $310,000
As-Is BPO: $260,000
State: Judicial (New Jersey)
Timeline: 18–30 months
Borrower Hardship: Verified
Legal + Carry Costs: $18,000–$28,000
Max Bid:
$180,000–$205,000 depending on exit strategy.
This is where professionals win or lose.
✅ 9. 5 Most Common Beginner Mistakes (Avoid These)
-
Buying notes without a clean chain of assignments
-
Ignoring servicing notes and borrower communication
-
Underestimating state foreclosure timelines
-
Overpaying for “performing” notes with weak seasoning
-
Buying from unverified or inexperienced sellers
Avoid these and you’re already better than 70% of new investors.
✅ 10. How to Start Note Investing With $10K–$50K
With small capital, beginners can start with:
$10K–$20K
-
Partials
-
Small-balance performing notes
-
Reperformers
-
Shared deals with a mentor
$20K–$50K
-
Quality performing notes
-
Lightly delinquent notes
-
2nd position notes
-
Entry-level non-performers
You don’t need $250K to become a note investor.
You need knowledge + discipline.
✅ 11. Beginner Workflow: How to Buy Your First Note
Here’s the exact workflow beginners should follow:
-
Identify a deal source
-
Request the full file
-
Review documents
-
Run valuation (PN or NPN)
-
Order BPO/O&E
-
Submit bid
-
Sign PSA (Purchase & Sale Agreement)
-
Board with servicer
-
Monitor performance
-
Execute exit strategy
Simple. Structured. Professional.
✅ 12. When You Should NOT Buy a Note
Do not enter this industry if:
-
You want instant money
-
You won’t read documents
-
You don’t understand real estate
-
You refuse to deal with servicing
-
You have no budget for legal fees
This is a business — not a get-rich-quick tactic.
✅ 13. FAQ
1. What is a mortgage note?
A mortgage note is a legal agreement documenting a borrower’s promise to repay a real-estate secured loan.
2. Is mortgage note investing safe for beginners?
Yes — if you stick to performing notes or partials with full due diligence.
3. How much do mortgage notes cost?
Anywhere from $8,000 to $150,000+, depending on risk, yield, and collateral.
4. Performing vs. non-performing — which is better?
Performing = lower risk, lower yield.
Non-performing = higher risk, higher reward.
5. What documents do I need to review?
Promissory note, mortgage, pay history, servicing notes, O&E, title, assignments.
6. How much money do I need to start?
Beginners can enter with $10K–$50K through partials or small-balance loans.
✅ Final Word: 2025 Is the Year of the Smart Note Investor
2025 favors disciplined buyers.
Not gamblers.
Not hype-chasers.
Not spreadsheet warriors who never read collateral files.
Smart note investors win because they buy with:
-
structure
-
documentation
-
valuation discipline
-
strategy
-
patience
-
and clarity
If you want to evaluate a note, send it.
I’ll tell you exactly what the asset is — and what the seller isn’t telling you.
—
Jeffery Hartman
Don of Debt | Fitzgerald Advisors
Note Buyer • Portfolio Strategist • Deal Architect
