Ultimately, mortgage loans finance the purchase of a property, while deeds transfer the ownership. When a mortgage loan originates, the borrower who applied for the loan assumes ownership through a deed. Later on, the borrower has the ability to add someone else as an owner through a second deed.
Most people can't afford to pay cash for a house, so they use a mortgage loan. Many different private banks and national mortgage lenders provide these loans to qualified borrowers who meet credit and income requirements. Commonly, one person or two closely related people — such as spouses — take out mortgage loans. At the loan's closing, the borrowers sign a lot of paperwork. Two of the most important documents are the promissory note and the security instrument. The promissory note provides evidence of debt, while the security instrument acts to secure the lender's interest in the property.
The property itself actually acts as collateral to secure the loan in favor of the lender. If the borrower defaults on loan payments, the lender forecloses and tries to sell the property to make back the lost money. The borrower agrees to this by signing the security instrument, which is either a deed of trust or mortgage depending on what state the property lies in. Each borrower must sign the security instrument, which is then filed on public record.
At the same time the mortgage loan closes the seller of the property signs a deed — typically a warranty deed — granting ownership of the property to the borrower. This deed is also filed on public record. Now, the security instrument and deed become part of the property's chain of title. The borrower is now the homeowner and has the right to transfer ownership to someone else. For example, if the borrower purchased the property when he was single and gets married later, he can use a deed to grant his spouse ownership in the property. This is generally accomplished by using a quitclaim deed rather than a warranty deed. As long as this deed is filed on public record, the added party shares ownership.
Granting someone ownership through a deed does not make them financially responsible for the mortgage loan. Only the borrower, or borrowers, listed on the mortgage loan have an obligation to repay that loan in the eyes of the lender. Conversely, if two borrowers have their names on the original deed and one is later removed — after a divorce, for example — this does not take away the financial obligation from the party that was removed. Alterations to the property's deed and chain of title have no effect on the mortgage loan. The only way to change financial responsibility is to refinance the mortgage loan and add or remove borrowers with the new loan.
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