📝 What Is a Promissory Note in Real Estate?

A promissory note is a signed, legal document in which a borrower promises to repay a specific amount of money to a lender under agreed terms. In real estate, it outlines the loan amount, interest rate, payment schedule, and default consequences.

How a Promissory Note Works

The promissory note is the borrower’s promise to repay. It is usually paired with a mortgage or deed of trust, which uses the property as collateral.

The note includes:

  • Loan amount
  • Interest rate and APR
  • Payment schedule
  • Late fees and penalties
  • Maturity date
  • Default and foreclosure consequences

The note itself is a legal contract and can be bought, sold, or transferred to another lender.

Why Promissory Notes Matter

For Borrowers:

  • Explains exactly how and when the loan must be repaid.
  • Defines interest costs and penalties.
  • Serves as proof of loan terms in disputes.

For Lenders:

  • A enforceable legal document for repayment.
  • Allows foreclosure if the borrower defaults.
  • Can be sold to another lender or investor.

Example of a Promissory Note

A buyer takes out a $300,000 mortgage. At closing, they sign:

  • A promissory note — their promise to repay the loan.
  • A mortgage/deed of trust — which secures the loan with the property.

If the buyer fails to make payments, the lender uses the deed of trust or mortgage to foreclose, based on the terms in the note.

Why Promissory Notes Matter in FSBO & Seller Financing

  • Used in purchase-money mortgages (seller financing).
  • Defines the payment terms between buyer and seller.
  • Protects the seller if the buyer defaults.
  • Makes the financing legally enforceable without a bank.