In title theory states, the lender or the lender’s agent has title to property. The borrower has possession of the property. It’s not really a mortgage. It’s called a trust deed.
The borrower is called a trustor.
A third party (the trustee) holds title to the property in trust.
The lender is called the beneficiary.
If the borrower fails to make the required payments, the trustee will use the power of sale clause which results in the property being sold at public auction.
When the borrower finishes making all payments, the trustee signs a reconveyance deed that transfers title back to the borrower.
In lien theory states there are two parties (lender and borrower), and two documents (promissory note and mortgage). Florida is a lien theory state.
The borrower owns the property and the lender has a lien.
The lien is recorded at the county clerk’s office.
If the borrower fails to make payments, the lender must file for a judicial foreclosure, which takes longer than the power of sale foreclosure in title theory states.
When the borrower has made all the payments, the lender must, within 60 days, sign and deliver to the borrower a satisfaction of mortgagewhich, when recorded, releases the lien.
A promissory note is legal evidence of a debt (the “IOU”), and must accompany all mortgages. It states the total amount of the debt, interest rate, term, and the payment amount.
A mortgage is an instrument in which property is pledged as security (also called “collateral”) for a debt.
It is often called hypothecation, which means the borrower can have possession of the property while making payments on the loan.
A mortgage must be written and signed by the borrower to be enforceable.
The mortgage must be recorded to create a valid lien on the property.
A mortgage is a contract between two parties, the mortgagor, (borrower) and the mortgagee (lender).
The borrower has legal title to the property, and the lender has a note and mortgage.
In case of foreclosure, the proceeds of the foreclosure sale are paid based on the loan priority. A first mortgage is paid before other mortgages. Any mortgage recorded after that will have a lower position and is called a junior mortgage.
Sometimes, a lender with a first mortgage enters into a subordination agreement so the mortgage moves to second place (subordinate) to a new lender.
Essential Elements of the Mortgage
Promise to repay—the borrower agrees to pay principal, and interest.
The lender also has the right to require an escrow fund, requiring the borrower to pay 1/12 of the annual charges for taxes, insurance, and community association dues.
The borrower promises to keep the improvements insured against loss by fire, windstorm and other hazards including hurricanes, sinkholes, and floods.
Occupancy—the borrower must promise to live in the property within 60 days and for at least one year.
Covenant of maintenance and good repair—the borrower promises not to damage or destroy the property and to keep the property in good repair to prevent deterioration.
Covenant against removal—the borrower promises not to move the house or any improvements off the lot.
Other mortgage provisions
A prepayment clause allows the borrower to pay the debt ahead of schedule.
A prepayment penalty clause requires a borrower to pay a fee to pay off the loan.
An acceleration clause allows the lender to require the borrower to pay off the entire balance of the loan immediately in case of default.
The right to reinstate gives the borrower a right to stop foreclosure proceedings if, at least five days before foreclosure sale, he or she pays the lender all back payments, attorney’s fees and expenses.
A due on sale clause allows a lender to require immediate payment of the loan if the property is sold without the lender’s consent.
A defeasance clause requires the lender to give the borrower a release from the mortgage debt when the last payment is made.
A receivership clause gives the lender the right to get a court order appointing a receiver to collect rents, pay bills, and send the excess to the lender in order to pay the loan balance.
Common Mortgage Features
The down payment for a property is calculated by subtracting the mortgage balance from the purchase price of the property.
The loan-to-value ratio on a loan is calculated by dividing the loan amount by the property value.
A property’s equity is the difference between the value and the mortgages.
Interest is the “rent” that is paid for borrowing money.
Mortgage lenders normally charge interest on the outstanding balance of the loan.
PITI—the borrower’s payments to the lender consist of principal, interest, taxes and insurance (PITI).
Discount points are a fee charged by a lender to increase the lender’s total interest yield.
A “point” is equal to 1% of the loan amount.
For each discount point, the yield on a loan is increased by approximately 1/8 of 1%. If the charge for points is 2%, the lender’s yield is increased by 2/8, or ¼ of 1%.
A loan origination feeis a commission for creating a loan.
Loan servicing—a lender services the loan by collecting payments, sending the principal and interest to the investor and paying taxes and insurance when due.
Take out commitment—when a bank finances a construction loan for a large project. The construction lender will want a commitment from a permanent lender to “take out” (pay off) the construction loan when construction is completed.
Assignment of the Mortgage
Most lenders sell the mortgages immediately after a closing to secondary market investors.
The lender assigns all rights and duties to the investor, using a document called an assignment of mortgage.
An estoppel certificate verifies the balance of the loan, the interest rate, the payment amount, and the number of payments remaining.
Methods of Purchasing Mortgaged Property
In the few cases where a mortgage does not have a due on sale clause, a buyer may take title to the property in one of two ways:
Subject to the mortgage—the buyer acknowledges the existence of the mortgage, but does not accept personal liability for the debt. The seller remains contingently liable for the debt until it is paid.
Assuming the mortgage—the buyer agrees to take personal responsibility for paying the mortgage. This doesn’t relieve the seller from liability, but it gives the lender an additional person who is liable.
Contract for deed (land contract) is also called an agreement for deed, land contract, or installment contract.
The buyer receives equitable title, but does not receive legal title (a deed) until the purchase price is fully paid.
The seller retains legal title until the purchase price is fully paid.
Florida statutes make it illegal for a real estate licensee to sell the parcel of property that is encumbered under a blanket mortgage unless the parcel can be released at any time for an amount less than the amount owed on the parcel of real estate.
A contract for deed is a legal instrument that conveys equitable title, and must be prepared by an attorney.
Real estate licensees may not prepare a contract for deed.
Land Development Loans and Construction Loans
Land developers finance the property purchase and building of infrastructure with a land development loan
The lender has collateral in the form of a blanket mortgage,
A partial release of lien is given by the lender when the developer sells lots.
Construction loans are disbursed as draws as the construction is completed.
When the builder sells the house, the loan is repaid to the lender from the proceeds.
When the developer of an office building or apartment complex borrows on a short-term construction loan, the lender requires the developer obtain a takeout commitment.
A home builder may be willing to pay cash to the lender up front to buy down the payments in the early years of the loan.
Consequence of default—the lender has several options to enforce the mortgage covenants.
The lender may accelerate the loan. Then the lender may foreclose the property.
Lis pendens—the first step in the foreclosure process is for the lender to file a lis pendens,giving notice that there is a pending legal action against the property.
Equity of redemption—allows the borrower to pay the total balance due to the lender, thereby stopping the foreclosure sale and getting a satisfaction of mortgage.
Judicial foreclosure means that the lender files a lawsuit in court, having it served to the borrower.
The clerk of the court auctions the property to the highest bidder after a period of advertising the sale.
The proceeds from the sale first pay delinquent property taxes, government expenses of the sale, then the mortgage debt.
If there are junior mortgages, any excess is paid first to those mortgages and the balance, if any, to the borrower.
Results of foreclosure
Deficiency judgments—if the proceeds from the sale do not pay all the debt, the lender may request a deficiency judgment from the court.
A foreclosure judgment eliminates the borrower’s rights and all liens against the property that are lower in priority than the mortgage. Those mortgagees would get any excess funds after the first mortgage is paid off.
After the foreclosure sale, the buyer gets a certificate of title from the clerk. Title passes to the buyer. There are no warranties given to the buyer, so the buyer should have a title search made by an abstractor or a title insurance company.
Deed in lieu of foreclosure—the borrower gives the lender a deed to the property subject to existing liens. Because it does not go through the courts, it is called a nonjudicial foreclosure.
Short sales–when an offer comes in for a house at a distressed market value, the lender may agree to accept the proceeds, which may not be enough to pay off the debt, and release the mortgage.