Mortgage

A mortgage is a pledge of property to the lender as security of payment of the debt. The mortgagor is the borrower giving the pledge to the lender.

The basic steps for securing a mortgage are:
- Qualifying the buyer, which includes securing a credit report and employment history.
- Determining the debt-to-income ratio. A debt-to-income ratio is a loan-qualifying tool. Simply put, if you had a million dollars and owed ten dollars, that would be a good debt-to-income ratio. However, if you had ten dollars and owed a million dollars, that would be terrible.
 (When figuring out the debt-to-income ratio, do not forget the property!)
- The property must be appraised because it is the collateral for the loan.

The mortgagee is the lender receiving the pledge. The mortgagor is the one who borrows the money to purchase property.

The borrower will sign a note. A note is an evidence of debt, and it states the amount borrowed, the interest rate, and the loan terms. In a note, the borrower is making the promise to repay, so the borrower is the promisor and the lender is the promisee. When recorded, the mortgage becomes a voluntary lien on the property. The rights the borrower gives the lender in a mortgage document are determined by state law.

States are classified as lien theory, title theory, and intermediate theory states.

Remember a lien is a legal interest that a creditor has in a person's property.

Most states are lien theory states, which give the lender a lien interest in the property. This means that if the borrower defaults, the lender would foreclose through a judicial sale.

A judicial sale is a sale made under court order, rather than a voluntary sale by the owner or one appointed by the owner.

The borrower borrows money from a lender. Before the lender gives the borrower the money, the borrower must sign an "I.O.U" which is called the note. The note states the terms of the loan, for instance the rate of interest and the number of years which the borrower has to pay back the loan. But more importantly for the lender, the note is proof of the loan. For thousands of years across many civilizations, the note was always needed in order to demand payment. Loss of the note often meant that the lender could not request that a court enforce payment.

What security does the lender have once they give the money to the borrower? The security, known as "collateral", is the property which is bought with the funds given to the borrower (and sometimes other properties are pledged also). The borrower pledges that property to the lender. "Mortgage" actually means "pledge". The borrower pledges to give the lender the property if the borrower can not pay back the loan in full.

As noted in the previous section, the buyer/borrower pledges the property to the lender as security for the loan that the lender gave. The suffix "or" is used to denote the person who performs an action; while the suffix "ee" is used to denote the recipient of that action.Since the buyer/borrower is pledging the property, he/she is "mortgaging" the property and in known as the "mortgagor". The lender is the recipient of the pledge, and therefore is the "mortgagee".

One way to remember the difference between the "mortgagor" and the mortgagee:

The "o" in "mortgagor" comes from the "o" in "borrower". The "e" in "mortgagee" comes from the "e" in "lender":

MORTGAGOR = BORROWER

MORTGAGEE = LENDER

Just remember, the mortgagor mortgages the property to the mortgagee.

Finally, it is worth pointing out that there was a time when the owner of a property could sell it and freely transfer the mortgage to the new owner. Due to the modernization of the credit market, lenders want to know who owes them money. Since the new owner might not be as creditworthy as the original owner/mortgagor, lenders now insert a "due on sale" clause. This clause requires that a mortgage be paid off when the underlying property is sold. Nowadays, the seller sometimes finances some of the buyer's needs, and sometimes a relative or friend might give the buyer a second loan on top of the bank loan. Otherwise, the mortgagee is always a financial institution.

Much of the confusion concerning mortgages and notes today actually stems from a semantic problem: is "mortgage" a noun or a verb? Unfortunately, many people use the word "mortgage" to mean a loan, saying things such as "I got a mortgage from the bank", or "Who owns the mortgage?" This leads to confusion, since "mortgage" is really a pledge of property as security, and does not have a separate existence from the note that it guarantees. Since "mortgage" really means to pledge, which is a verb, it should not be used as a noun.

Here are some common misuses of the word "mortgage":

WRONG
I took a mortgage.
I got a mortgage from the bank.
I signed the mortgage.
The owner of the mortgage is not the owner of the note.

CORRECT
I got a loan from the bank.
I borrowed money and I mortgaged the house.
I signed the mortgage document.
The title owner of the note/mortgage is not the equitable owner of the note/mortgage.

While the difference between "mortgage" as a noun or a verb might seem trivial, we will see that the misuse of this word has caused endless headaches, misunderstandings, confusion, and legal wrangling.