Mortgage Note Investing: How to Price and Buy Notes

Mortgage note investing means buying the right to collect a homeowner’s loan payments, the promissory note and the mortgage or deed of trust that secures it, usually at a discount to the unpaid balance. You earn the interest and the discount if the borrower pays, and if they do not, you hold the lender’s remedies, including foreclosure, so your real job is pricing that risk correctly.

4.37%U.S. 1–4 unit mortgage delinquency rate, Q2 2026, seasonally adjusted (MBA)

0.67%Share of loans in foreclosure inventory, Q2 2026 (MBA)

1,968Non-performing loans Freddie Mac reported selling in its Oct. 2026 offering

For a wholesaler, notes are a natural next step. The skills overlap: you already value houses, read title, and talk to owners in distress. Notes also show up in your own deals when a seller carries financing or a buyer wants to exit a seller-financed property. This guide covers how notes work legally, where they come from, how to price them with a worked yield example, the federal rules that apply, and when note investing is the wrong fit.

What you are actually buying

Every mortgage loan has two documents. The promissory note is the borrower’s promise to pay. The mortgage or deed of trust is the security instrument that lets the lender foreclose if they do not. When you buy a note, you need both, transferred properly.

Most residential notes are negotiable instruments governed by Article 3 of the Uniform Commercial Code. Under UCC 3-203, a note is transferred when it is delivered so the buyer can enforce it, and the buyer gets the seller’s right to enforce it. A note is negotiated by delivery plus endorsement, either on the note itself or on an allonge, a separate page firmly attached to the note. A buyer who takes a negotiable note for value, in good faith, and without notice of defenses can become a holder in due course under UCC 3-302, which cuts off many borrower defenses. Not every note qualifies as negotiable, so this protection is typical rather than guaranteed.

The security instrument moves by an assignment of mortgage or assignment of deed of trust. Recording the assignment in the county land records is standard practice and protects you, though in most states the security follows the note even before the assignment is recorded. If you are not sure how those two instruments differ, read our deed of trust vs. mortgage guide.

Performing vs. non-performing notes

Notes fall into two broad camps, and they are different businesses:

	Performing note	Non-performing note (NPL)
Borrower status	Paying on time, or close to it	Typically 90+ days delinquent, in foreclosure, or in bankruptcy
Typical buyer goal	Steady monthly income	Resolve the default for a profit
Pricing basis	Remaining payments discounted to a target yield	Property value, lien position, timeline, and costs to resolve
Main risk	Future default, prepayment, servicing problems	Foreclosure time and cost, property condition, title issues
Work involved	Mostly passive with a good servicer	Active: loan modifications, short sales, deeds in lieu, foreclosure

Re-performing notes, loans that went delinquent and are now paying under a modification or repayment plan, sit in between. They usually price higher than NPLs but lower than clean performing loans because of the default history.

Where notes come from

Large NPL sales. Fannie Mae and Freddie Mac still sell pools of non-performing loans. Freddie Mac announced a $474 million NPL offering in September 2026 that included a smaller pool aimed at smaller investors, and in October 2026 it reported selling 1,968 loans from that offering, with cover bids in the mid-80s to mid-90s as a percentage of unpaid balance, per its seasoned loan offerings releases. Fannie Mae announced a separate NPL sale in October 2026 on its newsroom. Buyers in these sales agree to offer borrowers loss mitigation before foreclosing. These pools are mostly bought by funds, but they set pricing that trickles down.
HUD reverse mortgage note sales. HUD’s current single-family sales are mainly HUD-held reverse mortgage loans, many on vacant homes where the borrowers have died, listed on its housing asset sales page.
Small banks, credit unions, and funds. Smaller institutions sell individual loans or small pools, often through note brokers and online note marketplaces.
Private seller-financed notes. A retiree who sold a house with seller financing may want a lump sum instead of 20 years of payments. These are often the most negotiable deals for individual investors.
Notes you create. When you sell a property with seller financing or a wrap-around mortgage, you create a note. You can hold it or sell it, and how you write it decides what it is worth.

Pricing a note: a worked yield example

Performing notes are priced by yield. All figures below are hypothetical.

A private seller holds a first-lien note on a house worth about $140,000. The unpaid principal balance (UPB) is $80,000 at 7% interest with 240 monthly payments left. That works out to a payment of $620.24 a month.

Purchase price (hypothetical)	Price as % of UPB	Yield if held to maturity (annual, nominal)
$80,000	100%	7.00%
$72,000	90%	About 8.4%
$68,000	85%	About 9.19%

At $68,000, the monthly internal rate of return is about 0.766%, or about 9.19% a year nominal (about 9.59% effective). The discount adds roughly 219 basis points over the note rate. If the borrower refinances or sells early, the discount comes back sooner and your yield rises. Those figures assume no defaults, no prepayment, and no servicing costs, so subtract servicing fees, typically charged monthly, and build in a default reserve. Our internal rate of return guide explains the math behind the IRR.

Two other numbers drive the price:

Investment-to-value (ITV). At $68,000 against a $140,000 house, your ITV is under 50%. If the borrower stops paying, you have a large equity cushion to recover your money through a workout or foreclosure.
Loan-to-value. The $80,000 balance against $140,000 is about 57% LTV, which also gives the borrower a reason to keep paying or refinance. Our loan-to-value ratio guide covers how lenders read this.

NPLs are priced differently. You start from what the property is likely to sell for, subtract foreclosure time and legal costs, back taxes, repairs, and your target profit, and the result is your bid. In a judicial-foreclosure state, the timeline can stretch well past a year, and every month costs you taxes, insurance, and attorney fees.

Worked example: bidding on a non-performing note

Here is how the NPL math looks with hypothetical figures. A first-lien note has a UPB of $150,000, the borrower is 14 months behind, the house is occupied, and your broker price opinion puts the as-is value at $210,000. The property is in a judicial foreclosure state.

Line item (hypothetical)	Amount
Expected resale value after foreclosure, as-is	$210,000
Foreclosure attorney fees and court costs	−$9,000
Property taxes and insurance advanced during 18 months	−$12,000
Servicing fees during the default	−$2,500
Cleanout, repairs, and eviction costs after foreclosure	−$15,000
Resale commission and closing costs	−$14,000
Net recovery if it goes all the way to foreclosure	$157,500
Target profit (about 20% of recovery)	−$31,500
Maximum bid	About $126,000

That bid is 84% of UPB, which happens to sit near the cover bids Freddie Mac reported for its 2026 pools. Foreclosure is the worst case, not the plan. In practice, many NPLs resolve sooner: the borrower reinstates, accepts a modification and becomes a re-performing note you can hold or sell, agrees to a deed in lieu, or sells the house. Every one of those paths returns your money faster than the full foreclosure assumed in the bid, which is where most of the profit comes from.

How the property’s state changes the math

Foreclosure timelines drive NPL pricing more than anything else. ATTOM’s mid-year 2026 foreclosure report put the national average foreclosure timeline at 563 days, the lowest since 2013. That average hides a wide range between judicial states, where a court case is required, and nonjudicial states, where a trustee sells the home after statutory notices.

State	Usual residential process	What it means for a note buyer
Florida	Judicial	Plan for a court case and longer carrying costs; see our Florida foreclosure timeline
New York	Judicial	Among the slowest; settlement conferences add time; see New York foreclosure process
Illinois	Judicial	Court process plus a redemption period; see Illinois foreclosure process
Texas	Nonjudicial	Fast trustee sales on the first Tuesday of the month; see Texas foreclosure timeline
Georgia	Nonjudicial	Monthly courthouse-step sales after published notice; see Georgia foreclosure timeline
California	Nonjudicial	Trustee sale after recorded notices; see California foreclosure timeline

A note in a judicial state should price lower than an identical note in a nonjudicial state, because your money is tied up longer and legal costs run higher. Some buyers specialize by state for exactly this reason.

Due diligence before you buy any note

Collateral file. Original note with a complete chain of endorsements or allonges, the recorded security instrument, and every recorded assignment back to the original lender.
Payment history. At least 12 months, ideally the full life of the loan. Look for irregular payments, suspended payments, and modifications.
Title and lien position. Order a title search or an O&E report to confirm the lien is first position (or exactly what is ahead of it), and check for unpaid property taxes, HOA liens, and municipal liens. Our title search guide covers the basics.
Property value. A broker price opinion, drive-by, or desktop valuation. A note is only as good as the house behind it.
Borrower status. Bankruptcy filings, occupancy, insurance coverage, and whether the borrower is the original signer or has died.
State rules. Foreclosure process, redemption rights, and licensing requirements in the property’s state, which can differ sharply from where you live.

The federal rules note buyers must follow

Owning consumer mortgage loans brings compliance duties, even for a small investor:

Notice of sale or transfer. Under the Truth in Lending Act and Regulation Z section 1026.39, a covered person who acquires more than one mortgage loan in any 12-month period must send the borrower a transfer disclosure within 30 calendar days after the transfer.
Servicing transfer notices. Under Regulation X section 1024.33, the old servicer must notify the borrower at least 15 days before a servicing transfer takes effect and the new servicer within 15 days after, or both can send one combined notice at least 15 days before.
Foreclosure timing. Under 12 CFR 1024.41(f), a servicer cannot make the first foreclosure notice or filing until the loan is more than 120 days delinquent, and even small servicers are subject to that rule.
Servicer licensing. Many states require a license to service residential mortgage loans. Vermont, for example, requires companies that collect payments on Vermont residential loans to hold a servicer license through NMLS. Most individual note investors use a licensed third-party servicer instead of collecting payments themselves.
Tax reporting. If you receive $600 or more of mortgage interest from an individual in the course of your trade or business, IRS Form 1098 instructions require you to file Form 1098. Interest income is taxed as ordinary income.

Creating notes the right way: Dodd-Frank seller-financing rules

If you create notes by selling houses with owner financing, two sets of federal rules decide whether you are acting as a regulated lender.

The loan originator rules in 12 CFR 1026.36 include two seller-financing exemptions:

Three-property exemption. Any person who seller-finances three or fewer properties in any 12-month period, each owned by them, may qualify if they did not build the home in the ordinary course of business, the loan is fully amortizing, they determine in good faith that the buyer has a reasonable ability to repay, and the rate is fixed or adjusts only after five or more years with reasonable caps.
One-property exemption. A natural person, estate, or trust that seller-finances one property in 12 months, did not build it, and makes a loan with no negative amortization and the same rate limits. Balloon payments are allowed under this one.

Separately, the ability-to-repay rule applies to creditors. Under 12 CFR 1026.2(a)(17), you generally become a creditor for dwelling-secured loans if you extend that kind of credit more than five times in the prior or current calendar year, or make more than one high-cost mortgage in 12 months. Sell a dozen houses with owner financing in a year and the rules change. A well-documented note that meets these rules is also easier to sell later, because note buyers price compliance risk heavily.

When mortgage note investing is the wrong move

You need your money back soon. A performing note pays out over years. Selling it early often means accepting a deeper discount than you paid.
You cannot fund a foreclosure. NPL investing needs cash for attorney fees, property taxes, insurance, and months of carrying costs. If one default would sink you, start with performing notes.
You are buying in an unfamiliar judicial state. Timelines and costs vary widely. Learn one state’s process first.
The paperwork has gaps. A missing endorsement or a broken assignment chain can delay or block foreclosure. Price it heavily or pass.
You want hands-on upside. Notes are a yield business. If you want to add value through renovation, flipping or a BRRRR strategy usually fits better.

Mortgage note investing questions

Is note investing passive?

Performing notes with a licensed servicer are close to passive. Non-performing notes are active work that involves negotiating with borrowers, hiring attorneys, and sometimes taking the property.

How much money do you need to start?

There is no fixed minimum. Individual private notes can trade for well under $50,000, while large agency pools are bought by institutions. Start with one note you can afford to carry through a default.

What happens if the borrower stops paying?

Your servicer works through loss mitigation options such as a repayment plan, modification, short sale, or deed in lieu, and if none work, the loan is foreclosed under the property state’s process after the federal 120-day period.

Can I buy a note on a property I would like to own?

Yes, and some investors buy NPLs specifically to acquire the property. Price that path with the full foreclosure timeline and costs, and remember the borrower may cure or negotiate along the way.

Notes reward patience and paperwork. Price every note on yield and on the house behind it, follow the federal transfer and servicing rules, and only buy defaults you can afford to see through.

Keep learning creative finance and lending

Seller financingCreate the note Wrap-around mortgagesLayered notes Balloon paymentsNote structure Private lendersThe other side Due-on-sale clauseLender rights Notice of defaultDefault signals Deficiency judgmentsAfter the sale REO propertiesBank-owned homes

Learn the deals behind every note

Get the free starter kit: a deal analyzer to value the house behind a note, starter contracts, a seller script for owners carrying financing, and a buyer’s list checklist so you can exit properties you take back.

Get the free kit

Fresh from the blog