A performing note is one where the borrower is paying on time. A non-performing note is one where they've stopped, usually for 90 days or more. They're priced very differently, and they carry different risks.
I buy both, with a preference for notes with a long, steady payment history. Here's why each one matters.
Performing notes
The borrower pays every month, and the payments flow to the note owner.
- Price: usually closer to what's owed, since the payments are already coming in.
- Main risk: that the borrower stops paying later.
- What helps: seasoning, meaning a long history of on-time payments. A borrower who has paid for years is more likely to keep paying.
My Wilson, North Carolina note is an example. The borrower had a spotless payment history, the house was worth many times what I paid, and it paid off in full.
Non-performing notes
The borrower has stopped paying.
- Price: a much bigger discount, because there's work to do and no payments coming in.
- Main risk: time and cost. Getting the borrower paying again, or getting to the property, can take months or years.
- What helps: a low price compared to the home's value, and a clear plan for a workout or foreclosure.
Free lender guide: 5 questions to ask before you lend to anyone, plus a 12-item document checklist.
Re-performing notes
A non-performing note that starts paying again becomes re-performing. Often that's after a payment plan or loan change. A note that has re-performed for a year or more starts to look a lot like a performing note, and its value goes up.
What it means for a lender
- Performing notes usually mean steadier payments from day one.
- Non-performing notes can work out well, but they take longer and need a bigger cushion.
- Either way, ask about the price compared to the home's value. Here's what ITV means.
Common questions
When is a mortgage note considered non-performing?
Usually when the borrower is 90 days or more behind. Some sellers use different cutoffs, so ask how they define it.
Why are non-performing notes so cheap?
No payments are coming in, and it takes time and money to get the borrower paying again or to foreclose. The discount pays for that work and risk.
What does a seasoned note mean?
A note with a long history of on-time payments, often 12 months or more. Seasoned notes are usually seen as lower risk.
Written by Larry Hoffman
Managing Member of LJH Investments, LLC in Madison, Indiana. In real estate since 2006, with 300+ mortgage notes bought. Author of Mailbox Money Retirement.
General education, not legal, tax, or investment advice. Talk with your own attorney and tax adviser about your situation. All investing has risk, including loss of principal.