Mortgage : Financing Instruments


Financing Instruments

I: Notes And Mortgages

The purchase of real estate or mortgage can usually be regarded as a joint venture between an equity investor and a lending institution.

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 real estate.



  1. 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.

  1. 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.

In this manner, the home loan itself is a lien not proof of an obligation.

  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.

  1. Mortgage requirements

Since a home loan passes on an enthusiasm for land, it must be recorded as a hard copy.

The real wording of the archive may fit in with rather wide rules, yet ought to contain basically indistinguishable components from the deed.

The basic mortgage should contain the following elements:

  1. The mortgagor’s legal name must appear.
  2. Thisimplies 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.

  1. The instrument must contain a legal description of the mortgaged property that adequately identifies it.
  2. Reference is usually made to the promissory note.
  3. in lieu of the amount of consideration that is found in a typical deed.
  4. The mortgage must be signed by the mortgagor.
  5. Although it is not essential for mortgagees to sign documents, they usually do.

Mortgage Theory

  1. Early mortgage history

In the early years, a home loan – property vowed to verify an obligation – was a genuine task of that property to a bank.

During the timeframe that the mortgagor stillowed the mortgagee partof the first credit, the moneylender had physical utilization of the land and was qualified for any rents or incomes created from the land.

Subsequently, in the ‘earlierforms of home loans, title to the land swore assecurity for an advance was really moved to the bank.

Maltreatment with respect to moneylenders achieved progressively cautious wording in the home loin instruments.

Slight deferrals in reimbursing the credit frequently brought about “lawful default,” with borrowers relinquishing any rights to the recuperation of title to their property.

Anoutgrowth of the early encounters ofboth moneylenders and borrowers is the present day qualification between the title hypothesis and lien hypothesis ofmortgages.

  1. Lien theory

Lien theory is a more modem approach to creating loan security and is used in most states.

In lien theory states, the lender is considered to hold a lien, rather than title, against the property for security of the debt.

and Alien is the right to have property sold to satisfya debt.

In the event of default on the promissory note, foreclosure proceedings are initiated, and the title is conveyed from the borrower to the lender.