What exactly is a mortgage? Well, let's start here.
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 promissory 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 the evidence of the debt.
What security does the lender have once they give the money to the borrower? The security, known as "collateral", is the property that is bought with the funds given to the borrower.
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, which is why the appraisal is important to get the loan. The lender needs to know that the value of the house can cover the loan amount in case of default.
On your exam, you will hear the words mortgagor and mortgagee.
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. I use the example in another video of how Santa Clause is a giftor to the children who receive presents as giftees. Remember OR givOR; EE RecEEVes.
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". People get that confused because they think that since the borrower is receiving money, they should be the mortgagee. But you always have to remember what is being given and what is being received. In this case, it's the pledge for the property.
Lenders or "mortgagees" want to know who owes them the money. Upon sale, the new owner might not be as creditworthy as the original owner or "mortgagor", so lenders typically insert a "due on sale" clause. This clause requires that a mortgage be paid off when the underlying property is sold.
States fall into two categories regarding securing a loan made for the purchase of real property: Title Theory states and Lien Theory states.
In Lien Theory states, the real property is pledged, that is, mortgaged, to the lending institution, which has a lien on the real property. Any purchaser of the property takes it subject to the lien. Remember, lien means you owe money.
The second method is called Title Theory, and uses trust deeds. In Title Theory states, the buyer of the property actually conveys the legal title of property to a third party called a trustee. Using our OR EE rule again, the trustee receives title, which would make the borrower who gives the title in order to get the loan the trustor. The bank in this scenario is known as the beneficiary. For more information on this, refer to my video on trust deeds.