A mortgage deed or mortgage agreement is a written document officially recognizing a legally binding relationship between a borrower and lender. When a borrower takes out a loan to purchase a real estate property, they agree to pay the lender back for the loan through this document.
Importance of Using a Mortgage Deed
- It provides security for the loan.
- It legally establishes the lender’s lien on the property.
- It grants borrowers simple access to financing.
- It can provide lower interest rates than unsecured loans.
- It allows for a structured foreclosure process if necessary.
When to Use a Mortgage Deed
You can use a mortgage deed if you loan money to another person and want to keep a security interest in the property until they pay back their debt. Alternatively, you can initiate a mortgage deed if you want to borrow money and offer the property you’re purchasing as a security to the lender that you’ll meet your repayment obligations.
Some specific use cases for this document include:
- Purchasing a home
- Refinancing an existing mortgage
- Investing in commercial real estate
- Obtaining a government-backed loan, like a loan that the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA) insures
Key Elements of a Mortgage Deed
A simple mortgage contract generally includes the following elements:
- The parties’ information: The borrower’s and lender’s identifying and contact information.
- Property details: A summary of all the mortgaged property’s details, including its material facts, location, and value.
- The principal sum of the loan: The starting amount of the loan and any interest thereon the buyer must pay over time.
- Repayment terms: The terms to which a buyer agrees to pay back a mortgage loan.
- Mortgage conditions: Conditions under which the buyer will receive a loan, including a credit check, employment verification, and proof of income.
- Remedies and default: The remedies available to the lender in case the buyer defaults.
- Redemption rights: The borrower’s right to redeem the property even after they default if they pay off the outstanding loan balance.
- Registration and stamp duty: The costs associated with distributing a loan.
A mortgage deed should clearly state the amount of money borrowed (the principal amount), the interest rate charged, and the principal (the interest amount) agreed upon in the loan agreement or promissory note.
How Does a Mortgage Deed Work?
A mortgage deed involves several steps to create a concise and legally binding relationship between a borrower and a lender. It begins with a loan agreement that the borrower (the mortgagor) and the lender (the mortgagee) enter into. Within this agreement, they outline the loan’s terms and conditions.
Once they settle on these details, they begin writing the deed. Within this deed, they highlight the borrower’s agreement to give the lender a lien on the property. This document also covers details like the property description and unique mortgage covenants.
From there, the following steps occur:
- The parties record the mortgage deed in the public land records office of the county where the property resides. This way, other parties know that the property has certain restrictions.
- Following the deed’s guidelines, the borrower pays the lender back for the loan. The borrower should make timely payments, pay real estate taxes, maintain property insurance, and fulfill other responsibilities.
- If the borrower defaults on their loan payments, the lender can exercise their right to initiate foreclosure proceedings.
- If the borrower makes all their payments, the lender releases the mortgage and records the release in the public land records office. Then, the borrower has unrestricted ownership of the property.
Mortgage Deed vs. Deed of Trust
A mortgage deed and a deed of trust create a lien on a property to secure loan repayment. Some states allow one or the other, while others permit both. Explore their key differences below:
States That Allow Them
Here’s a list of states that allow mortgage deeds and deeds of trust:
State | Mortgage Deeds Permitted? | Deeds of Trust Permitted? |
---|---|---|
Alabama | Yes | Yes |
Alaska | No | Yes |
Arizona | Yes | Yes |
Arkansas | Yes | Yes |
California | No | Yes |
Number of Parties
- A mortgage deed is between two parties: The borrower and the lender.
- A deed of trust is between three parties: The lender, the borrower, and the trustee.
Structure
Within a mortgage deed, the lender must ensure the borrower meets their payment obligations.
Within a deed of trust, a trustee holds the borrower’s title in escrow until they meet all their payment obligations. The trustee can initiate foreclosure on the lender’s behalf if the borrower doesn’t make their payments.
Foreclosure Process
One of the significant differences between this agreement and a deed of trust is the lender’s remedy if the borrower defaults.
- With a few exceptions, mortgages are usually foreclosed judicially.
The lender must obtain a court order through the judicial process to take control of the property in foreclosure. Depending on the court’s calendar, the strength of the borrower’s defenses, and other procedural requirements, the foreclosure process could take several months to a few years.
- Deeds of trust typically go through a nonjudicial foreclosure process.
If a deed of trust has a “power of sale” clause (and most do), the trustee can foreclose on the property without a court order.
Keep in Mind
The non-judicial foreclosure process can be completed within two to three months.
However, each state has its rules, notice periods, and judicial and non-judicial foreclosure procedures so timelines may vary. Lenders must strictly follow these rules to avoid any challenges to the foreclosure sale.
Certain states also have a redemption period, giving the borrower a certain amount of time to buy back the property.
Here’s a summary of the differences between the two documents:
Mortgage Agreement | Deed of Trust | |
---|---|---|
Who are the parties: | Borrower Lender | Borrower Lender Trustee (escrow company, title company, neutral third party) |
Who holds the title: | Lender | Trustee |
Who holds equitable title/right to use the property: | Borrower | Borrower |
What happens if the Borrower defaults: | Foreclosure sale through the court system | Non-judicial foreclosure sale without a court order |