What a Promissory Note Should Include (With a Real Example)

August 12, 2026 · Creative real estate finance, explained with real deals

Generated (Gemini), via Wikimedia Commons

A promissory note is the IOU. It is the document that says who owes what, at what rate, on what schedule, and what happens if they stop paying. If you are seller financing a house, lending on a note, or doing a subject-to deal with a wraparound, you need one that actually holds up, not a form you found in a five-minute Google search. Drafting a solid note takes an hour or two if you know what belongs in it, and a $200 to $600 attorney review is cheap insurance on a note worth six figures.

What you need

• Full legal names and mailing addresses of borrower and lender (not nicknames, not "Smith Properties LLC" if the actual signer is an individual)
• Principal amount and the date the loan starts
• Interest rate, stated as an annual percentage, and whether it is simple interest or amortized
• Payment amount, due date each month, and where payments get sent
• Term length and maturity date, or balloon date if the loan doesn't fully amortize
• Late fee amount and the grace period before it kicks in (5 to 15 days is typical)
• Prepayment terms, usually a statement that the borrower can pay early with no penalty
• Default clause defining what counts as default and what the lender can do about it (accelerate the balance, foreclose, etc.)
• A line referencing the security instrument, if the note is secured by a mortgage or deed of trust
• Governing law (which state's law controls) and venue for disputes
• Signature lines, and notarization if your state or your title company requires it for recording purposes

Step by step

1. Lock in the numbers first. Before you write a word, agree on the loan amount, rate, term, and payment. Run the amortization schedule so both sides see the actual payment number and know it matches what an amortization calculator produces. Disagreements about "what the payment should be" after signing are avoidable if you do this step properly.
2. Decide the payment structure. Fully amortized over the full term, interest-only with a balloon, or amortized on a longer schedule (like 30 years) with a balloon in 5 to 10 years. Each of these needs different language. An interest-only note should say so explicitly, not just show a payment number, because a generic template will assume amortization by default.
3. Draft the note with every required clause. Use the checklist above as your outline. Do not skip the default clause or the late fee clause because "we're friendly, we won't need it." Notes get sold, inherited, or enforced by people who were not part of the friendly handshake.
4. Tie it to the security instrument. If there's a mortgage or deed of trust, the note should reference it by stating it is secured by a mortgage/deed of trust of even date, recorded (or to be recorded) in the county records. The mortgage should reference the note back. These two documents need to match on amount, rate, and parties, or you create a mess if you ever need to foreclose.
5. Sign, notarize if needed, and store it properly. The note itself usually doesn't get recorded, the mortgage does, but many states or title companies want the note signature notarized anyway. Keep the original note with the lender. Whoever holds the original enforceable note is generally the party who can enforce or sell it.

A sample note (simplified)

Here is roughly what the core paragraph looks like in a basic seller-financed note. Treat this as a structural example, not something to copy-paste without review:

"For value received, [Borrower Name] promises to pay to the order of [Lender Name], the principal sum of $[Amount], with interest at the rate of [X]% per annum, in monthly installments of $[Payment Amount], beginning [Date] and continuing on the [Day] of each month thereafter, until [Date], the Maturity Date, at which time the entire remaining unpaid principal balance and accrued interest shall be due and payable in full as a balloon payment. Payments shall be applied first to accrued interest, then to principal. If any payment is not received within [10] days of its due date, a late charge of [5]% of the payment amount, or $[flat fee], whichever is [greater/less], shall be due. This Note is secured by a Mortgage/Deed of Trust of even date on the property located at [Property Address]. Borrower may prepay all or part of the principal at any time without penalty. If Borrower defaults on any payment and fails to cure within [30] days of written notice, Lender may declare the entire unpaid balance immediately due and payable and may pursue all remedies available under the security instrument and applicable law. This Note shall be governed by the laws of the State of [State]."

Note the bracketed pieces. Every one of them is a decision you and the other party need to make on purpose, not default language that happened to be in a template.

Where this goes wrong

The most common failure is vagueness dressed up as simplicity. A note that says "$1,500 a month until paid off" with no stated rate, no amortization schedule, and no maturity date is a headache waiting to happen. When the balance doesn't match anyone's mental math five years in, there's no document to point to.

The second common failure is a note and mortgage that don't match. Different dollar amounts, different names, a note that says one rate and a mortgage that implies another. Title companies and courts read these documents literally. A mismatch can delay or block a sale, a refinance, or a foreclosure.

The third is skipping the default and late fee clauses because the deal feels informal, often between family or people who already know each other. Feelings change once payments stop. Without clear default language, the lender's remedies become a matter of general contract law and state statute instead of a clear path both parties already agreed to.

The fourth is ignoring the due-on-sale and assumability question. If the borrower wants to sell the property later, or refinance, the note should say whether the loan is assumable and under what conditions. Silence here creates arguments later, usually at the worst possible moment, mid-transaction.

Last, plenty of private lenders forget usury limits. Every state caps the interest rate you can legally charge on certain types of loans, and the cap and its exceptions vary a lot. A note with a rate above the legal limit can be unenforceable for the interest portion, or in some states, unenforceable entirely.

When to stop and call someone

Get a real estate attorney to draft or review the note any time real money is on the line, which is almost always. Specifically, call one if: the note will be secured by an owner-occupied residence and you are the seller (this can trigger Dodd-Frank ability-to-repay and SAFE Act licensing requirements depending on how many properties you've financed and whether you're a licensed loan originator), if you plan to sell the note to an investor later (it needs to be structured to be assignable and compliant from day one), if the deal involves a wraparound mortgage where an underlying loan stays in place, or if your state has usury limits you're not sure your rate falls under.

Templates and general guides, including this one, are a starting point for understanding what belongs in a note and why. They are not a substitute for a licensed attorney checking your specific numbers against your specific state's law before you both sign. If you write for or read sites like Paper & Property to learn how these deals are structured, use that knowledge to ask your attorney better questions, not to skip hiring one.