Michael, what state is the home in?
Couple of things to keep in mind in lending is how you can foreclose if you need to. In Texas it is FAST, in other states it can take MONTHS.
You can avoid most of the headache by having the borrower sign a Deed in Lieu of Foreclosure. You would simply explain to the borrower that rather than public embarrassment of having their home sold on the court house steps, etc, they can offer a Deed in Lieu and quickly remedy that particular situation. You would keep the DLF in your file for that home and once the party notifies you, or met the agreed upon situation for foreclosure, you would simply file that deed. So, it is public in record only.
Their credit would not be impacted by you in that you post it to the bureaus, rather it would come up on public record searches.
You, I believe are required to issue a 1099 or obtain a judgment for the balance you are unable to recover upon sale of the property to the new owners.
Now, what you could do is take back the house by them signing the deed over to you in the presents of a notary (AFTER you have done due diligence to see if taxes etc were paid and no junior liens are on the property like other judgments) and issue a simple ‘release’ stating the terms of the promisory note have been met. If you were to do that AND you have the deed to the property it would be a non issue credit wise.
Depending on what state you live in you could incur fees or taxes during the process. I would tell a title company what you are doing and have the buyers furnish you with an Owner’s title policy no matter what and have their insurance list you as additionally insured.
And because I am not an attorney, you just might want to see one or discuss this with the attorney of the title company so that the promissory note is done properly and your interests are properly cared for. I wouldn’t do this the first time without a re attorney.