Topic 12.1: Mortgage concepts >

Learning Objectives

After successfully completing this topic, you will be able to
• distinguish between title theory and lien theory, and
• describe the essential elements of the mortgage instrument and the note.

Mortgage law

Title theory

Florida is not a title theory state. In title theory states, the lender or the lender’s agent has title to property. The borrower has possession of the property while not in default. 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.

Lien theory

Florida is a lien theory state. In lien theory states a loan transaction consists of two parties (lender and borrower), and two documents (promissory note and mortgage). 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.

Loan instruments

A promissory note is an essential element of a mortgage

A promissory note must accompany all mortgages.

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 note without a mortgage is an unsecured note. Because of the size of most property loans, lenders require the borrower to sign a mortgage as security for the debt. The mortgage gives the lender a lien on the property.

The Freddie Mac promissory note form is the most widely used in Florida.


A mortgage is an instrument in which property is pledged as security (also called “collateral”) for a debt. 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.

Parties to a mortgage       

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 personal asset called a note and mortgage.

Satisfaction of Mortgage

When the borrower has made all the payments, the lender must, within 60 days, sign and deliver to the borrower a satisfaction of mortgage which, when recorded, releases the lien.


Borrowing money to purchase a house is often called hypothecation, which means the borrower can have possession of the property while making payments on the loan.

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First mortgages versus junior mortgages

Loan priority is very important to lenders. If a borrower fails to make all payments due on the loan, the property may be sold at foreclosure to satisfy the debt. The proceeds of the foreclosure sale are paid based on the loan priority. Institutional lenders usually require that their loan be in first place, called a first mortgage. Any mortgage recorded after that will have a lower position and is called a junior mortgage. The priority of other liens is usually based on the date the liens were recorded.

A buyer financed his house purchase with two mortgages; the first mortgage to a savings association and a second mortgage to the seller. Unfortunately, the title closing agent mixes up the order of recording at the county clerk’s office, and records the seller’s mortgage before recording the savings association’s mortgage. In case of foreclosure, the proceeds will pay the seller’s mortgage before paying the savings association.

Subordination agreements

As discussed, the priority of loans is very important because the loan that has first priority gets paid first in case of foreclosure. Sometimes, a lender with a first mortgage agrees to take second place (subordinate) to a new lender.

Developers who want to sell building sites to builders often are asked to finance the purchase and take back a mortgage. The developer’s mortgage would be in first position. If the builder wants to get a construction loan to build a house, the construction lender will require that the developer subordinate its mortgage so that the construction lender will have the first mortgage. If the developer agrees to the subordination, the developer is likely to sell more building sites.