The purchase of real estate can usually be regarded as a joint venture between an equity investor and a lending institution. Very few occasions arise where properties are bought for all cash. In most real estate transactions a lender provides a part of the financing, and the property is held as security for the debt. There are two instruments involved when a real estate transaction involves both debt and equity - the note and the mortgage.
A. Promissory note
A promissory note is a signed document acknowledging the existence of a debt and promising repayment. The chief function of the note is to make the borrower personally liable for payment of the debt. Once an individual has signed such a note, the t e n of the repayment schedule must be met regardless of the financial success of the property.
B. Mortgage
A mortgage is a pledge of security for the repayment of a debt. It is created by formal written agreement in which the person who signs a promissory note pledges the property being financed as security (or collateral) for the debt. Therefore, the mortgage itself is a lien - not evidence of a debt.
1. Parties to the mortgage
There arc two parties in each mortgage, the mortgagor and the mortgagee. The mortgagor is the borrower, or the one pledging the property as security for the debt incurred. The mortgagee is the lender, or the one to whom the property is pledged. In the process of borrowing money and pledging property as security, the borrower signs a note which is evidence of the debt. Without this evidence, no mortgage can exist. The mortgage is an instrument which creates an interest in property. This interest is a lien, or legal claim, on the mortgagor’s property until the debt is paid.
2. Mortgage requirements
Since a mortgage conveys an interest in real estate, it must be in writing. The actual wording of the document may conform to rather broad guidelines, but should contain essentially the same elements as the deed. The basic mortgage should contain the following elements:
a. The mortgagor’s legal name must appear. This implies that the mortgagor is of legal age for contracting.
b. The mortgagee’s name must also appear in the mortgage.
c. The mortgage must contain words of conveyance or granthg from the mortgagor to the mortgagee.
d. The instrument must contain a legal description of the mortgaged property that adequately identifies it..
e. Reference is usually made to the promissory note, in lieu of the amount of consideration that is found in a typical deed.
f. The mortgage must be signed by the mortgagor. Although it is not essential for mortgagees to sign documents, they usually do.
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