Note-on-note financing
Note-on-note financing is a loan to a lender secured by a note the lender owns. The lender keeps the original loan and its income, pledges the note as collateral, and stays liable for the financing even if its borrower defaults.
How it works
Also called note hypothecation or loan-on-loan financing. A lender owns a real estate loan. A capital provider lends to the lender against that loan, advancing part of its balance, and takes a security interest in the note (and, through it, the mortgage). Under the Uniform Commercial Code a secured party can perfect a security interest in an instrument such as a promissory note by taking possession of it. The original borrower keeps paying the lender; the lender pays the note-on-note lender.
Why lenders use it
- Keep ownership of the loan and the spread between the note rate and the financing cost.
- Free part of the capital in a loan without selling it.
- The borrower relationship doesn’t change.
What to watch
The lender carries the credit risk: if its borrower stops paying, it still owes the financing. Advances are usually well below the full loan balance, so some of the lender’s capital stays in the loan, and the financing may carry covenants or margin requirements. It is borrowing, not selling.
Where Lender Capital fits
Lender Capital places first-lien, business-purpose real estate loans with capital partners. You apply once, then submit each loan with the full file. We send it only to capital partners whose criteria it fits, one partner funds the whole loan at closing and it is assigned to them. You keep your points (less the placement fee), earn the spread above the partner’s rate and service the loan. You pay a placement fee only when a loan funds.
Lender Capital is a business-to-business platform. This page is general information, not legal, tax or securities advice. Terms of warehouse lines and other funding sources vary by provider; confirm them with each provider and your counsel.