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Introduction
The previous chapters explained how ownership of real property is established, transferred, recorded, examined, and insured. Those doctrines answer an important question:
Who owns the property?
This chapter begins answering a different question:
How is real property used to secure the repayment of a debt?
In modern real estate transactions, most purchasers do not pay the full purchase price in cash. Instead, they borrow money from a lender and grant the lender a security interest in the property. That security interest is ordinarily created through a mortgage or, in some jurisdictions, a deed of trust. A mortgage is one of the most common methods of financing real estate and secures repayment of an underlying obligation, usually evidenced by a promissory note. (Legal Information Institute)
Understanding mortgages requires recognizing that the loan transaction involves two separate legal relationships:
- the borrower's obligation to repay the debt; and
- the lender's security interest in the real property.
Although closely related, these are distinct legal concepts.
What Is a Mortgage?
A mortgage is a legal instrument that creates a security interest in real property to secure repayment of a debt or other obligation.
The mortgage itself is not the debt.
Instead, it serves as collateral for the debt evidenced by the promissory note. If the borrower defaults under the loan documents and applicable law, the lender may seek to enforce its security interest through the remedies available under the mortgage and governing law. (Legal Information Institute)
| Instrument | Primary Function |
|---|---|
| Promissory Note | Evidence of the borrower's obligation to repay |
| Mortgage | Security instrument securing repayment with real property |
| Deed | Transfers ownership of real property |
| Title Insurance Policy | Protects against certain covered title defects |
The Debt and the Security Instrument
One of the most important principles in mortgage law is that the debt and the security instrument are separate legal concepts.
The Promissory Note
The promissory note is the borrower's written promise to repay the loan.
It ordinarily identifies:
- the borrower;
- the lender;
- the principal amount;
- the interest rate;
- the payment schedule;
- maturity date;
- default provisions.
The note establishes the personal obligation to repay the debt.
The Mortgage
The mortgage secures that repayment obligation by creating a security interest in the real property.
Unlike the note, the mortgage is ordinarily recorded in the public land records so that third parties receive notice of the lender's interest. (Legal Information Institute)
Although they arise from the same transaction, they perform different legal functions.
Parties to a Mortgage
Every mortgage transaction includes two principal parties.
Mortgagor
The mortgagor is the borrower who grants the mortgage.
The mortgagor generally retains ownership and possession of the property unless and until foreclosure occurs under applicable law. (Legal Information Institute)
Mortgagee
The mortgagee is the lender receiving the security interest.
The mortgagee's interest exists to secure repayment of the underlying obligation.
Creating a Mortgage
Although requirements differ by jurisdiction, a mortgage transaction generally requires:
- an underlying debt;
- a written mortgage instrument;
- execution by the borrower;
- an adequate legal description of the property;
- delivery;
- compliance with applicable state law;
- recording to protect priority against later claimants.
Recording is important because it gives notice to later purchasers and creditors, but recording does not create either the debt or the mortgage itself. (Legal Information Institute)
Lien Theory and Title Theory
American jurisdictions generally follow one of three approaches concerning the legal effect of a mortgage.
Lien Theory
Under the lien theory, the borrower generally retains legal title while the lender holds a lien or security interest.
Most states follow this approach. (Legal Information Institute)
Title Theory
Under the title theory, legal title historically passes to the lender as security for the loan, while the borrower retains equitable rights, including the equity of redemption. The practical consequences of this theory vary by state. (Legal Information Institute)
Intermediate Theory
Some jurisdictions recognize an intermediate theory, under which the lien theory generally applies until the borrower defaults, after which title-related consequences may arise according to state law. (Legal Information Institute)
| Theory | General Rule |
|---|---|
| Lien Theory | Borrower retains legal title; lender holds a lien |
| Title Theory | Lender holds title as security under state law |
| Intermediate Theory | Lien theory until default, then modified title consequences |
Rights and Duties Before Default
A mortgage does not ordinarily deprive the borrower of ownership or possession.
Before default, the borrower generally retains the right to:
- occupy the property;
- use the property lawfully;
- receive rents and profits (unless otherwise agreed);
- sell or transfer the property, subject to the mortgage and applicable law.
The borrower also generally remains responsible for:
- making loan payments;
- maintaining the property;
- paying property taxes;
- maintaining required insurance.
The lender generally has the right to:
- receive payments according to the note;
- monitor compliance with loan documents;
- enforce contractual remedies if default occurs.
Default and Acceleration
A borrower is generally in default when the borrower fails to perform obligations required by the loan documents.
Common defaults include:
- missed payments;
- failure to maintain required insurance;
- failure to pay property taxes;
- breaches of other mortgage covenants.
Many mortgages include an acceleration clause.
An acceleration clause permits the lender, under specified circumstances and subject to applicable law, to declare the entire unpaid balance immediately due after a qualifying default. Foreclosure, however, is governed by state law and the mortgage documents; default alone does not automatically transfer ownership to the lender. (Legal Information Institute)
Recording the Mortgage
Mortgages are commonly recorded in the local land records office.
Recording serves several purposes:
- establishes public notice of the lender's security interest;
- protects priority against later interests under applicable recording acts;
- assists title examiners and future purchasers.
Recording connects mortgage law directly to the recording system discussed in the previous chapters. (Legal Information Institute)
Common Mortgage Provisions
Mortgage documents commonly include provisions concerning:
- acceleration;
- escrow accounts;
- maintenance obligations;
- hazard insurance;
- due-on-sale clauses;
- condemnation proceeds;
- default remedies.
These provisions allocate rights and responsibilities between the borrower and lender and are interpreted under the governing contract and applicable law.
Common Misconceptions
"The Mortgage Is the Loan"
Not exactly.
The promissory note is evidence of the debt.
The mortgage secures repayment of that debt with real property. (Legal Information Institute)
"Signing a Mortgage Gives the Lender Ownership"
Generally, no.
In most jurisdictions, the borrower continues to own and possess the property unless foreclosure or another legally recognized event changes those rights. (Legal Information Institute)
"Paying Off the Loan Automatically Removes the Mortgage From the Public Records"
Not necessarily.
After the debt is satisfied, the mortgage ordinarily must be released or satisfied according to applicable state law and recording procedures so that the public record reflects that the lien has been discharged.
Relationship to Other Property Doctrines
Mortgage law connects to many of the property doctrines discussed earlier in this collection.
| Doctrine | Relationship to Mortgages |
|---|---|
| Deeds | Convey ownership to the borrower before or during the financing transaction |
| Recording Acts | Determine priority of recorded mortgage liens |
| Chain of Title | Mortgages become part of the property's recorded history |
| Title Insurance | Protects against certain covered title defects affecting the secured property |
| Foreclosure | Provides the legal process for enforcing the mortgage after qualifying default |
Key Takeaways
- A mortgage is a security instrument that secures repayment of an underlying debt with real property. (Legal Information Institute)
- The promissory note and the mortgage are separate legal instruments that serve different legal functions. (Legal Information Institute)
- Recording the mortgage provides notice and helps establish priority but does not create the debt itself. (Legal Information Institute)
- Most states follow the lien theory, under which the borrower generally retains legal title while the lender holds a security interest. (Legal Information Institute)
- Default may permit enforcement of the lender's contractual and statutory remedies, but it does not automatically transfer ownership to the lender. (Legal Information Institute)
- Understanding mortgages provides the foundation for studying the promissory note, assignments, servicing, and ultimately foreclosure.
Continue Your Reading
Next Chapter — The Promissory Note
The next chapter examines the promissory note, the legal instrument that evidences the borrower's obligation to repay the loan. Readers will learn how the note differs from the mortgage, the significance of negotiable instruments under Article 3 of the Uniform Commercial Code, endorsements, transfers, holders, and why understanding the note is essential before studying mortgage assignments, servicing, and foreclosure. (Legal Information Institute)