Mortgage Liens: Definition & Overview

Instructor: Shawn Grimsley
If you are planning to finance the purchase of real estate, you may have to contend with a mortgage. In this lesson, you'll learn what a mortgage is and how it relates to the purchase of real estate. A short quiz follows the lesson.

Mortgage Defined

Emanuel is a first time homebuyer, and he's going to have to finance a large portion of his purchase. He's working with a bank that is willing to provide him a loan to purchase the property but is requiring a mortgage. A mortgage is an interest in real estate given to a lender by a borrower to secure payment of a loan. The mortgage serves as a lien on the property until the loan is paid.

You should note that Emanuel does not receive a mortgage from his bank but rather gives a mortgage on his property to the bank. In our example, Emanuel is the mortgagor and the bank is the mortgagee. We often call a mortgage a security interest because it is an interest in property held by a creditor that secures payment of an underlying debt obligation.

Promissory Note & Mortgage

It's important to understand the role of a promissory note in a mortgage. The first thing to note is that the mortgage is not Emanuel's loan. The actual legal instrument that evidences the loan is called a promissory note, which is a signed unconditional promise to pay a certain amount of money (principal and usually interest) on a certain date. Typically, the payments are scheduled for monthly payments usually spanning 15 or 30 years.

The mortgage, on the other hand, helps to make sure the promissory note is paid. The lender can file a lawsuit in court for judicial foreclosure and seek a court-supervised sale of the real estate. The sale proceeds will be used to payoff the balance due on the promissory note and the costs related to the sale and lawsuit. If the lender buys the property at the sale, the mortgage usually merges with the lender's title to the property, which extinguishes the mortgage.

Creation

The bank doesn't have a right to a mortgage simply because it gives Emanuel a loan. Emanuel must voluntarily agree to give the bank a mortgage on the property because it is a consensual lien. Of course, the bank doesn't have to give a loan if Emanuel refuses to give a mortgage. Since a mortgage gives an interest in real property, it must be in writing signed by the borrower to comply with the statute of frauds, which requires certain contracts be in writing and signed.

Recording & Priority

As long as Emanuel properly executes the mortgage, it will legally bind him. But who gets paid first if there are competing claims to Emanuel's property? This may be a problem if there simply isn't enough value in the real estate to pay everyone should the property be sold.

Priority depends on when the mortgage was filed in relation to other liens or claims (though there are certain exceptions). In a state that uses a race system of recording, the claim that is recorded at the land records office first has priority over subsequently recorded claims regardless of whether the person recording has notice of a previous claim that has not been recorded yet. On the other hand, if the state uses a race-notice system, the first person to record will have priority unless the person has notice that there is an unrecorded prior claim. If that's the case, then the priority goes to the prior unrecorded claim. Let's look at an example.

Emanuel inks a mortgage on Monday, May 1 with First State Bank . He turns around and signs another mortgage with Second State Bank on May 2. Second State Bank records the mortgage on that same day, but First State Bank waits to record until May 3. Under a race system, Second State Bank has priority even though the mortgage was created second because it was recorded first. However, under a race-notice system, Second State bank will be first only if it didn't know about the mortgage given to First State Bank.

Satisfaction & Release

Once Emanuel has paid off the promissory note in full compliance with its terms, his loan obligation has been satisfied. The lender has an obligation to release the mortgage on the property since it's no longer owed any money. Recording a document, often called a satisfaction of mortgage, with the land records office in the county where his property is located provides public notice that the mortgage no longer encumbers the property.

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