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Like any other investment, a mortgage note involves a certain degree of risk that could affect its value. Based on the intensity of risk and some other factors, a mortgage note holder will have to take a discount on the face value of the note. The discount value is determined by the following factors:

Buyer’s credit score: If the Payer’s credit score is below 620-650, it imposes a greater risk thereby warranting a deeper discount as opposed to a higher credit score that provides confidence to the investor that the Payer will not miss any payments.

Collateral: The current fair market value of the collateral, its type and condition, together with the local and national economic conditions determine the value of the note.

Seasoning: If the Payer has made at least 12 timely monthly payments on a note, it is considered seasoned.  A well seasoned note is more valuable and justifies a lesser discount.

Equity: The amount of down payment a Payer makes at the time of purchase determines the hard equity. If the hard equity is 20% or more, the value and salability of the note increases.  If the fair market value of the collateral securing the note appreciates, that equity is not as important as the hard equity.

Payment History: A history of timely payments by the Payer would increase the value of the note.

Balloon Payment: A fully amortized note is considered less risky than a note with a balloon payment. A Payer will have to secure a conventional loan to pay off the balloon payment thereby increasing the foreclosure chances.  

Time Value of Money: Money received now is worth more than the money collected in future. For example, $1,000,000 at 10% interest rate is worth approx. $600,000 today if it was to be received in 5 years as opposed to approx. $136,000 today if it was to be received in 20 years. Hence, the longer the length of the loan, the deeper the discount will be.

Interest Rate: The higher the interest rate of the note, the more valuable it is.

Legal Documentation: A note must be drafted in accordance with the lending standards of institutional lenders containing the necessary legal disclosures, terms, and important conditions in order to avoid affecting the note value adversely.

Note Management: The complexity of the note and its underlying collateral determines the note buyer’s (investor) yield requirement. If a note requires more attention and management over time, it results in a lower market value for the note. Moreover, a first position note is less management intense and represents a substantially lower risk as compared to notes in junior positions. 

A Note Seller would almost always take a discount on the principal value of the note based on the collective analysis of the aforementioned factors that determine the amount of risk involved in a specific transaction. Even in the best of scenarios, the note value will be discounted by at least a small amount to cover the closing costs if the note is paid off sooner than anticipated. 

Please refer to our mortgage note buyers section to get more information on how to sell mortgage note.