What is a promissory note in real estate, and why does it matter?

If you're buying a home, you should cognize there's a upland of paperwork involved. One of the galore important forms you request to reappraisal and motion is the promissory note.

The promissory note, fundamentally a borrower’s committedness to repay a loan, makes your statement with the owe lender legally binding. You tin deliberation of it arsenic an IOU that holds up successful court. If you don't instrumentality to the outgo statement that's spelled retired successful the promissory note, you could extremity up losing your location to foreclosure.

In this article:

• What is simply a promissory note?

• How promissory notes work

• What’s included successful the promissory note?

• Types of promissory notes

• FAQs

In existent estate, a promissory enactment is simply a legally binding papers that outlines definite details of your location loan. This document, usually 2 to 3 pages long, specifies what you beryllium the lender, including the owe main amount, involvement rate, repayment schedule, and maturity date.

The promissory enactment besides states that your spot is collateral for the indebtedness until the afloat indebtedness is paid off, and it lays retired immoderate penalties for missed payments. In different words, the lender tin foreclose connected your location if you don't marque your payments arsenic agreed.

When it comes clip to adjacent connected your home, you'll person to motion your Closing Disclosure, the owe (also referred to arsenic the deed of trust), and the promissory note. Depending connected the requirements successful your state, you whitethorn request a notary contiguous erstwhile signing these documents.

After you sign, the lender usually keeps the archetypal papers and gives you a copy. From that constituent forward, the promissory enactment volition enactment successful effect until you either wage disconnected the indebtedness oregon refinance your mortgage. Once you refinance oregon repay the owe indebtedness successful full, the lender volition nonstop you a last connection showing your relationship equilibrium is present $0.

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The laws astir what has to beryllium included successful a promissory enactment alteration by state, but you tin expect to find the afloat details of your outgo statement successful this document. Here's what the lender volition typically include:

• Loan amount

• Interest rate

• Total magnitude you'll pay

• Payment schedule

• How payments volition alteration implicit clip (if applicable)

• Length of clip to repay the loan

• Where you should nonstop your payments

• Late fees and penalties

• Borrower’s and lender’s names and addresses

• Borrower’s and lender’s signatures

Read more: What is simply a location deed?

When it comes to buying a home, promissory notes tin beryllium sorted into 2 types, with 1 benignant being acold much common:

• Secured promissory note: The promissory enactment is secured by utilizing your location arsenic collateral. So, if you neglect to marque monthly owe payments, the lender tin foreclose connected the property. The foreclosure process doesn't typically statesman until you miss a fewer consecutive payments.

• Unsecured promissory note: The enactment is not backed by the location arsenic collateral, truthful falling down connected payments does not enactment you astatine hazard of losing property. These types of promissory notes are communal for idiosyncratic loans and pupil loans but not for mortgages.

Learn more: Closing connected a location — What to expect and however to prepare

A promissory enactment and a owe are not the aforesaid thing. Both are ineligible documents utilized to finalize your location purchase, and each contains accusation astir your indebtedness payments, but the owe ties the spot to the indebtedness arsenic collateral.

The lender whitethorn merchantability your promissory note. If this happens, your payments volition enactment the same, but you whitethorn person to nonstop them to a antithetic company, besides known arsenic a servicer. It’s comparatively communal for lenders to merchantability mortgages and promissory notes to servicers aft closing.

No — it's considered predatory and unethical for a lender to inquire you to motion a promissory enactment earlier your indebtedness is approved. If a owe lender asks you to bash this, they tin perchance suffer their lending license.

This nonfiction was edited by Laura Grace Tarpley.