If you're like most people, you will need a mortgage to buy a new house. A mortgage is a loan for the purchase of real estate that uses the property itself to make sure the borrower repays the debt. If the borrower fails to live up to his end of the deal, the bank can foreclose and seize the house. Most mortgages are paid in monthly installments that include both principal and interest. A mortgage agreement that fails to meet certain legal requirements is technically not binding. Courts can enforce an equitable mortgage, though, if they decide the parties intended to create a legal contract.
A legal mortgage is simply a mortgage done the right way. Each state has its own rules for what qualifies as a valid mortgage, but the basics are the same everywhere. When you close on your home, you will sign several documents. You will review and sign paperwork that explains your rights and obligations as well as those of your lender. To be enforceable, the mortgage agreement must be signed by both borrower and bank. It is also recorded in the county where the property is located.
Courts of Equity
Even if your mortgage is flawed, a court might declare it valid. When the pilgrims sailed to this country, they brought English law with them. For much of U.S. history, the legal system followed the old-world practice of dividing courts into two types: courts of law and courts of equity. Equity courts provided solutions unavailable in their legal counterparts. Eventually, the two courts merged, but we still retain both types of solutions -- called remedies. The objective of equitable remedies is restoration of fairness.
Mistakes happen. Even with the best intentions, papers get misplaced or someone forgets to sign an important document. Most people rely on the escrow company to take care of all the little details after the papers are signed. It might take years to uncover defects. If the borrower and the lender intended to create a legal mortgage, the courts can rule that the loan is an equitable mortgage. This makes the loan enforceable despite its flaws.
When you sell your home, you must clear the land of any liens before you can close on the deal. If your home is mortgaged, you must pay it off to remove the lender's interest. A mistake in your original contract could require legal action and delay the sale. While very little in life is foolproof, you can protect yourself by paying close attention to how your loan is handled. Double-check signature pages and keep copies of everything.
- Cornell University Law School: Mortgage
- Cornell University Law School: Seventh Amendment
- The University of Dayton School of Law: Distinction Between Law and Equity
- New York Real Property Law Journal: The Equitable Mortgage: Its Creation, Enforceability and Lien Priority
- Freddie Mac: Understanding the Mortgage Documents
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