Should I Buy Discounted Mortgage Notes? A Few Tips To Remember

by Jan 7, 2022

Mortgage notes investments have long been a dependable way to grow one’s savings. Investors can buy, sell, or create mortgage notes in order to make a profit. While most tend to favor what is called performing notes, investing in non-performing or discounted mortgage notes is gaining popularity as well.

Investing in non-performing notes allows investors to purchase the notes at a big discount (hence the name) and create a huge return on investment on it.

What is the difference between a performing and a non-performing note?

There are two main categories of mortgage notes:

  • Performing
  • Non-performing

A performing note refers to a mortgage loan where the borrower is still paying their debts on time. A non-performing note, on the other hand, is a mortgage loan where the borrower is not following the prescribed terms of the note. These borrowers have gone at least 30 days without paying their mortgage. Seriously delinquent borrowers refer to borrowers who have gone 90 days or more delinquent.

What you can do with non-performing notes

The number of non-performing notes also called distressed or discounted notes, has increased in the past few years. This is in part due to the ongoing COVID-19 pandemic which is making it more difficult for homeowners to pay their mortgage.
When borrowers fail to pay their mortgage on time, it creates an imbalance in debt and money received for the lenders, leading to lower reserve ratios and reduced liquidity. In order to maintain the balance, lenders choose to sell the mortgage notes at a much lower price, sometimes up to 90% off.

When someone chooses to invest in a non-performing or discounted note, it means that they are choosing to invest in a mortgage note where the borrower is no longer paying the mortgage and negotiate new terms with them in order for them to start paying again.

Because non-performing mortgage notes for sale are usually sold at such a discounted price, the investor has more leeway when it comes to finding new terms that will be beneficial to both borrower and lender. Some solutions could be to offer a forbearance plan or to create a formal loan modification that involves adjusting one or more of the original terms.

If the homeowner decides they no longer want the home, the investor can provide a deed in lieu of foreclosure wherein the borrower deeds the property to the investor in lieu of the lender foreclosure.

When absolutely no terms can be met, the investor can choose to foreclose the home which allows them to regain the title to the property. While this is a somewhat rare scenario, it is a possibility with non-performing notes.

Things to take note of

Unlike performing notes, non-performing notes are not a source of passive income. At least not from the get-go. If you plan on investing in non-performing notes, be ready to negotiate with borrowers in order for both of you to reach favorable terms. Once you have gotten the borrower to agree to the new terms, you can now earn passive income from what is now a performing note.

You also need to be prepared to renovate a home and put it out on the market if ever the borrower chooses to let go of their property. While this entails quite a bit of money and effort from your end, buying the mortgage note at a discounted rate ensures you have a sizeable return on your investment.


Mortgage notes in New York, both performing and non-performing, can be a great investment to make. But just like any investment, there comes some risk with it, particularly if this is your first time investing in it.

Make sure you have the guidance you need when investing in mortgage notes by consulting with the experts. Melanin Homes has a number of mortgage notes for sale for you to choose from as well as free consultations for anyone interested in investing in mortgage notes. Visit our website or contact us today to schedule your free consultation or to learn more about the mortgage notes we have to offer.

Watch out for more details and information on both commercial and residential mortgage note investing in our future blogs posts.

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