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Using a Promissory Note to Purchase a Home

Promissory Notes and Bank Loans

The promissory note or promissory letter is a binding legal instrument that acts as a borrower's promise to repay a private loan to a lender. Many individuals have the perception that a promissory note is nothing more than a complex version of an IOU, but the fact is that legal promissory notes act much in the same manner as official bank loan documents.

The main difference between a promissory note and a bank loan is that promissory notes allow anyone to become a lender of money or property and the only limiting factor is the lender's own discretion on who to lend to and what the terms of the repayment will be. Promissory notes and promissory letters have become increasingly popular as a vehicle for non-traditional lending that does not require borrowers to have excellent credit.

Promissory notes are instruments that allow people to lend and borrow money outside of normal channels based on the merits of the individual borrowing the money and the collateral they are putting up. In difficult economic times, people with less than perfect credit are finding that traditional lenders such as banks are becoming very particular with their lending guidelines.

Purchasing a Home without a Mortgage

People who would normally have qualified for a mortgage prior to the economic downturn are finding it difficult to find lenders who are willing to lend to anyone other than highly qualified buyers. This scenario not only prevents good potential buyers from purchasing a home, it also harms sellers because it is so much more difficult to find buyers who can qualify for traditional lending. This has led sellers to a situation where more and more of them are listing their own homes and utilizing legal promissory notes as a method to sell their homes to potential buyers.

Promissory notes are ideal for individuals who do not qualify for traditional mortgages because they allow them to purchase a home by using the seller as the source of the loan and the purchased home as the source of the collateral.

The buyer gives a down payment to the seller that acts as a gesture of good faith as well as security for the repayment of the note.

The home's deed also acts as collateral on the note and should the buyer default, the deed and the down payment are kept by the seller. The promissory note form dictates all the necessary terms of repayment of the loan as well as the consequences of failing to repay the loan.

The seller maintains the right to retake the property if the borrower fails to pay, and the borrower owns the home as long as they continue to pay according to the terms of the promissory note.

Repaying Loans with a Promissory Note

Because the promissory note is a legally binding instrument, it acts as a record of repayment for the borrower and can be applied to their credit record. If the buyer continually repays the note on time and according to the terms of the promissory note, it helps establish them as trustworthy borrowers for future lending.

Once a solid track record of repayment has been established, the borrower can refinance the promissory note with a traditional mortgage if desired and pay the seller off completely. This creates the opportunity for homeownership by people who otherwise would not qualify for a traditional mortgage.

Finding creative ways to acquire home financing has become a necessity during times of economic downturn. Individuals are sometimes forced to go outside of traditional methods of lending in order to achieve the dream of owning a home. The promissory note has become a viable and acceptable method of acquiring non-traditional lending in order for people with less than perfect credit to purchase a home.

It protects the buyer and the seller, and allows the borrower to buy time in order to improve their credit and obtain traditional financing should they so desire. The promissory note has become an excellent and often used instrument for people to secure or lend financing during a time when traditional financing is much harder to come by.

How to Create a Promissory Note

Use our promissory note template to create, download, and print your document in just minutes.