Contract

A contract is a legally binding agreement between two or more parties that creates enforceable obligations — the right to demand performance and the duty to fulfill promises. In mortgage note investing, contracts govern virtually every stage of the business: acquiring loans from sellers, resolving debts with borrowers, engaging service providers, and selling assets to other investors. While the underlying legal principles are universal, the specific contracts a note investor encounters are distinct to the secondary mortgage market.

Essential Elements of a Contract

For any agreement to be legally enforceable, it must contain certain elements:

If any of these elements is missing, the contract may be void or unenforceable. For note investors, capacity and legality issues are rare — the more common concern is ensuring that the terms are clear and that representations are backed by contractual remedies.

Key Contracts in Note Investing

Loan Purchase Sale Agreement (LPSA)

The LPSA is the binding contract that governs every mortgage note trade. It identifies the buyer and seller, establishes the purchase price, defines the cutoff date when economic risk transfers, and contains the seller's representations and warranties about the loans being sold. Critically, the LPSA includes repurchase and cure provisions — the buyer's primary post-closing protection if the seller's representations turn out to be false.

The LPSA is the single most important contract a note investor signs. Understanding its provisions — particularly the representations and warranties section and the repurchase clause — is essential to protecting your capital.

The Promissory Note

The promissory note is itself a contract — the borrower's legally binding promise to repay the debt according to specified terms (principal amount, interest rate, payment schedule, and maturity date). When you purchase a mortgage note, you are stepping into the lender's shoes as the party entitled to enforce this contract.

Workout and Modification Agreements

When resolving a non-performing loan, the investor and borrower may enter into a new contract such as a loan modification, forbearance agreement, or discounted payoff settlement. These contracts supersede or supplement the original loan terms and must be documented in writing to be enforceable.

Letter of Intent (LOI)

A letter of intent is a preliminary agreement that outlines the proposed terms of a transaction before the formal LPSA is drafted. LOIs are typically non-binding — they express the parties' intent to transact but do not create enforceable obligations. However, certain provisions within an LOI (such as confidentiality or exclusivity clauses) may be binding even if the overall document is not.

Engagement Letters and Service Agreements

Engagement letters formalize relationships with service providers — attorneys, servicers, brokers, and consultants. These contracts define the scope of work, fees, timelines, and liability. Having clear service agreements in place prevents misunderstandings and protects the investor when disputes arise.

Trust and Contracts in the Note Business

In mortgage note investing, the most important thing is trusting your counterparties. The contract serves as a worst-case-scenario document — a common reference that all parties can turn to if things go wrong. The majority of note transactions close smoothly because both sides are operating in good faith. But when a seller fails to deliver a complete assignment chain, or a borrower defaults on a modification agreement, or a service provider does not perform, the contract is what defines each party's rights and remedies.

This is especially important for note buyers working with new sellers. Established relationships built over multiple trades create trust that reduces friction. But for a first transaction with any counterparty, the contract must stand on its own — every representation, warranty, and remedy should be explicit.

Practical Tips for Note Investors

• Read every clause before signing. The LPSA is not paperwork to skim. Every provision — from the cutoff date to the repurchase clause — carries real financial consequences.
• Have an attorney review new contracts. For your first note purchase, or any trade with a new seller, the cost of a legal review is nominal compared to the cost of discovering post-closing that your contract offers no meaningful protection.
• Document workout agreements in writing. Verbal agreements with borrowers about payment plans or settlements are difficult to enforce. Always memorialize resolution terms in a signed contract.
• Keep executed copies organized. Every signed contract — LPSAs, modifications, engagement letters, and bills of sale — should be stored in a dedicated file for each loan or business relationship. These documents may be needed months or years after execution.