A Mortgage Deed, also called a Mortgage Agreement, is a written document that officially recognizes a legally binding relationship between two parties – borrower and lender.
What is a Mortgage Deed?
In a mortgage deed, a borrower grants a lender conditional ownership of specific property or assets as a security interest against a loan until the borrower repays the loan in full.
The mortgage deed is separate from the loan agreement or promissory note that creates the actual loan, and it sets out the terms and conditions of the loan.
The lender may also be called the mortgagee or trustee. The borrower may also be called the mortgagor or trustor.
A simple mortgage agreement will identify the following essential elements:
- Borrower: who is borrowing the money and pledging the property
- Lender: who is lending the money and receiving a lien on the property
- Principal Amount: the sum of money borrowed
- Property: a legal description of the property pledged
As a reference, a mortgage deed is also called:
- Mortgage Contract
- Deed of Mortgage
- Chattel Mortgage (for personal property)
What is the difference between a Mortgage Deed and a Deed of Trust?
A mortgage deed and a deed of trust create a lien on a property to secure repayment of a loan. However, this agreement is only between two parties – the borrower and the lender – whereas a deed of trust is between three parties – the borrower, lender, and trustee.
Some states use a deed of trust instead of a Mortgage Agreement.
The trustee holds the title of the property in trust for the lender. A deed of trust also allows the trustee to initiate a foreclosure sale on the property without a court order if the borrower defaults on the loan – also called the “power of sale.”
In contrast, the lender under a mortgage deed would have to initiate foreclosure proceedings through the courts.
Here is a simple chart explaining the differences:
| 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 |
What is the difference between a judicial foreclosure and non-judicial foreclosure?
One of the significant differences between this agreement and a deed of trust is the lender’s remedy if the borrower defaults. Under a mortgage agreement, the lender can only hold a foreclosure sale after filing a complaint and receiving a judgment from the court.
Depending on the court’s calendar, the number and strength of the borrower’s defenses, and other procedural requirements, the foreclosure process could take several months to a few years.
Here is an example of the judicial foreclosure process:
- Bob misses a payment on his loan – Leo sends him a notice of delinquency stating that the loan payment is past due.
- Bob does not make his payment and misses the following two payments as well – Leo sends him a notice of default, telling Bob he has thirty days to pay the three missed payments and make the loan current.
- Bob still doesn’t pay anything after the thirty days – Leo calls his lawyer to prepare a complaint with the court, asking for a judgment to authorize a foreclosure sale.
- Leo’s lawyer prepares the complaint and files it with the court.
- Bob receives notice of the complaint and has twenty to thirty days to file an answer to the complaint.
- Bob files his answer to the complaint, raising various defense claims. Note: If Bob does not answer the complaint, Leo wins in a default judgment.
- Bob and Leo argue it out in court.
- Leo wins and the court gives him a judgment authorizing a foreclosure sale.
- Leo publishes or sends Bob a notice of sale, stating the time and date he will sell the property.
- The foreclosure sale finally takes place.
- Leo gets his money.
In contrast, a deed of trust usually includes a “power of sale” clause, which allows the trustee to sell the property through non-judicial foreclosure.
In the example above, after Bob missed three payments and thirty days from the notice of default has passed, Leo can instruct the trustee to begin foreclosure proceedings. The trustee can then immediately publish or send Bob a notice of sale, and the foreclosure sale will occur at the stated time and place.
In addition to a mortgage deed and a deed of trust, there are other commonly used types of deeds. Each one offers different levels of protection during a real estate transaction. Make sure you select the correct type of deed for the sale or transfer of your property or piece of land.
When Do You Need a Mortgage Deed?
The purchase of a property or home is often a significant investment that involves a substantial amount of money. Lenders will want added security before loaning large sums of money to ensure that they will recoup their investment.
A mortgage deed allows them to take possession and sell the property if the borrower stops making loan payments. It also allows buyers to borrow large sums of money and provides an incentive to make payments on the loan or risk losing their property.
Why not just get a loan from the bank?
With the stringent lending conditions imposed by most banks and traditional lenders in today’s economy, many borrowers have difficulty securing financing to purchase a home. A private or alternative mortgage is another option for these borrowers.
The lender is typically a “big bank” with a long list of requirements for its borrowers with a conventional bank loan. In a private or alternative mortgage, the lender can be a trusting family member or friend making more interest on their excess capital than a traditional savings account while also helping out a loved one.
Family members or friends can often develop creative solutions for the borrower, including lower interest rates and unique payment options. The lender can also be a private investor or lending company specializing in loans to non-traditional borrowers. These lenders often charge more interest and have shorter payback periods than traditional ones. Still, they can be a good option for “flippers” or borrowers looking to renovate a property and then quickly resell it.
In a conventional bank mortgage, borrowers have large sums of money for a down payment and excellent credit. In a private or alternative one, the borrower can be self-employed and can’t show a steady income stream, has had a few bumps in the road and less-than-stellar credit, or has other debt and can’t qualify for a traditional loan.
Private mortgages, however, are risky. Borrowers may think family members will be lenient or forgiving for missing a payment or two. And higher interest rates and quicker payback terms combined with borrowers who don’t have a proven track record can lead to many defaults. The 2015 film The Big Short details the financial crisis of 2008 and the collapse of the housing market, primarily due to the overabundance of these “subprime” loans.
What are some of the tax benefits of a private mortgage?
The Internal Revenue Service (IRS) limits how much money family members can gift each other without paying gift taxes.
For example, in 2016, your father could gift you and your siblings up to $14,000 each without paying any gift tax. Or together, your mom and dad could give each of you up to $28,000 without any gift tax consequences. And these annual exemptions would not count against your mom or dad’s $5.45 million yearly gift exemption.
If your father has already maxed out his annual $14,000 exemption, he could still help you out in a time of need by essentially acting as a de facto “family bank” and using a private mortgage.
However, a private loan between family members is subject to the minimum IRS Applicable Federal Rates (“AFR”) published monthly.
As an example, here are the annual AFR Rates or minimum allowable interest rates required for a family loan for three months in 2016:
| SHORT-TERM LOAN < 3 YEARS | MID-TERM LOAN 3-9 YEARS | LONG-TERM LOAN > 9 YEARS |
|
|---|---|---|---|
| JUNE 2016 | 0.64% | 1.41% | 2.24% |
| MAY 2016 | 0.67% | 1.43% | 2.24% |
| APRIL 2016 | 0.70% | 1.45% | 2.25% |
For comparison, consult the current survey of business lending terms released by the Federal Reserve or the current average mortgage rates released by the Federal Reserve Bank of St. Louis.
The mortgage contract does not create the actual loan; it simply grants a lien on the property. You will need a separate agreement detailing the loan.
Why You Should Use a Mortgage Deed
Having a written agreement detailing the loan between you and a family member can prevent misunderstandings and prevent a family fight if something goes wrong. It can also prevent misunderstandings with the IRS.
As you can imagine, the IRS tries to crack down on gifts between family members disguised as a loan. You should have a valid and enforceable loan document to avoid having an intra-family loan deemed a gift (and be subject to gift taxes).
Without a secured loan, a lender is left with few options if the borrower goes bankrupt, gets sued unexpectedly, dies, or decides to stop making payments. The lender will have to go through a lengthy court process and stand in line with other creditors.
Here is a chart of some of the preventable suffering this document could prevent:
| Lender | Borrower |
|---|---|
| Large sums of borrowed money unpaid | Inability to receive financing |
| Non-priority debtor | Increased debt on property or house |
Expensive lawyer fees to:
| Expensive lawyer fees to:
|
| Loss of business relationship or family trust | Loss of business relationship or family trust |
| Personal safety & well being | Personal safety and well being |
The Most Common Mortgage Relationships
While these agreements usually occur between banks and individuals, two individuals or two organizations or entities conducting a business relationship can also use this agreement to document a private mortgage.
Here is a table detailing common borrowers and lenders who might need one:
| POSSIBLE LENDER | POSSIBLE BORROWER |
|---|---|
| Seller of a property or home | Buyer of a property or home |
| Private investor | Professional ‘flipper’ |
| Private mortgage company | Company looking to purchase an office |
Family member
| Family member
|
| Sympathetic friend with extra funds (i.e. able to lend but not give money) | Reliable friend needing cash (i.e. for a real estate investment opportunity) |
Mortgage Deed Sample
Below you can find what a mortgage deed typically looks like:
Mortgage Deed
What is in (How to Write) a Simple Mortgage Deed?
A simple mortgage contract should generally address the following:
Who is on the hook? (the Borrower and Lender)
The mortgage deed should name the person receiving the money (the borrower) and the person with the lien on the property (the lender).
The borrower and lender should sign the agreement before two witnesses, and a notary should verify and authenticate the signatures.
What is exchanged?
A mortgage contract should explicitly grant title to the property to the lender in exchange for the principal plus interest. This grant gives the lender legal title or ownership of the property, while the borrower has the right to use the property.
Once the borrower pays the loan in full, the mortgage agreement terminates and the borrower receives legal title to the property. If the borrower fails to make the scheduled loan payments, the lender retains legal title and can initiate a foreclosure sale.
When will the Agreement end?
The document should state that the agreement will terminate when the borrower pays back the loan in full.
Where is the property?
The agreement must clearly state the address and a legal description of the property. The borrower and lender need to be on the same page – if the lender thinks a mansion secures the loan, but the borrower is purchasing a shack, there could be trouble down the road.
You can usually find the legal description on the property’s deed.
Here is an example of a legal description is a Lot and Block form:
Lots 6, 7, and the South ½ of Lot 3, West 60 feet of South ½ of Lot 4, West 60 feet of Lot 5 and Lot 8, Block 20, OLD SURVEY, Leesville, Vernon Parish, Louisiana.
How much does the borrower need to pay back? (Principal and Interest)
A mortgage deed should clearly state the amount of money borrowed (the principal amount) and the interest rate charged and the principal (the interest amount) agreed upon in the loan agreement or promissory note.
The loan agreement promissory note should detail how and when the borrower will make the payments.
What other details do I include?
A mortgage deed may include these additional provisions:
- Assigned Rents: if the borrower is leasing out the property, include rents assigned to the lender
- Covenants: the borrower promises ownership of the property and authority to the property
- Default and Acceleration: if the borrower defaults, the entire amount of the loan becomes due
- Maintenance of Property: the borrower must maintain the property, including insurance on the property
- Ownership Transfer: the whole amount of the loan may become due if the borrower transfers ownership
- Payment: the borrower promises to pay the principal and interest, and other necessary amounts on the loan
- Rights of Lender: payments by the lender to maintain the value of the property in addition to the loan amount
- Security Interest: the agreement also secures any other liabilities of the borrower to the lender
- Senior Mortgages: the borrower cannot modify any senior mortgages without the Lender’s permission
- Tax Fund: the borrower may have to make payments to a fund to pay for property taxes, insurance, and other assessments
The lender must file this agreement with the appropriate local recording office.