A mortgage deed is a legal document that gives the lender an interest in a property when you take out a loan backed by the property. Some states use documents called mortgage deeds, and some use an alternate form called a deed of trust, while still others allow both. If a borrower doesn't pay back a loan in accordance with the agreement, the lender can foreclose and take possession of the land or have it auctioned off.
TL;DR (Too Long; Didn't Read)
A mortgage deed is a form usually filed at a land records office that allows a lender to recover property if a mortgage loan isn't paid. Exactly what it looks like varies based on state law.
How Mortgage Loans Work
The term mortgage loan is often used informally for any loan backed by property. They're often taken out to purchase a new property or to finance renovations or building on an existing property.
Generally, a borrower and lender agree to the terms of a loan, including how much money is being borrowed and how long the borrower will have to pay it back and how frequently payments must be made. Different loans have different interest rates based on borrower credit risk, and some have fixed rates that stay the same over time while others have adjustable rates that can fluctuate over time based on prevailing interest rates and the terms of the agreement. Mortgage agreements also can contain other requirements, such as that the borrower maintains homeowner's insurance coverage on the property.
To make sure the lender isn't left penniless if the borrower stops paying, mortgage loans are structured to allow the lender to foreclose on the property if the loan isn't paid according to the terms of the agreement. Exactly how foreclosure works depends on state law. A document called a mortgage deed or a deed of trust is filed at a local land records office, usually run by a city or county government, guaranteeing the lender's interest in the property.
Before you sign a mortgage agreement or any other legal mortgage contract form, you should make sure you understand it, reviewing it with an attorney if necessary.
How a Mortgage Deed Works
A deed generally is a legal document recording that somebody has a legal interest in a piece of property. There are various types of deeds used for different situations, from sheriff's deeds used when a sheriff auctions off a property to quitclaim deeds where someone transfers their right to a property to someone else. If you buy or sell a property, a title insurance company will usually verify that the history of deeds on the property is coherent and grants the new owner a clear right of title to it with no surprise owners lurking in the past.
Deeds are generally public records filed, often for a fee, with a county or city registry office. They can be viewed in person by anyone interested in knowing who has an interest in which parcels of land. In some places, they can also be viewed and searched online.
One type of deed is a mortgage deed, used to legally give a bank or other lender an interest in a property until a loan is paid off. The mortgage deed ensures that the lender will get paid if the property is sold and ensures the lender can foreclose on the property if the borrower stops paying.
When a mortgage loan is paid off, another document is filed at the local property records office called satisfaction of mortgage. This document indicates that the lender no longer has any legal interest in the property. Lenders are often required under state law to file this within a certain amount of time after a mortgage has been paid off, but it's a good idea for borrowers to make sure these documents are in order. If the satisfaction of mortgage isn't properly recorded, it can cause problems when the land is sold.
Rights in Mortgage Deed States
Generally, states that use mortgage deeds for property-related loans require lenders to use the court system for foreclosure on a property, usually demanding that the borrower pay off the loan in full or allow it to be sold. Precisely what this procedure looks like and how long it takes to complete varies from state-to-state.
Many states allow borrowers some leniency in making late payments to avoid foreclosure and regulate how quickly a lender can move to sell the property or take possession of it. Mortgages are, in some cases, also regulated by federal bank regulators.
Using a Deed of Trust
In some states, a slightly different type of deed called a deed of trust is used with property-related loans. Deeds of trust are more commonly used in Western states, including California and Alaska, while mortgage deeds are more commonly used on the East Coast. Some states, such as Texas, allow either to be used.
Deeds of trust involve three parties rather than just the borrower and lender. Generally, the borrower pledges the property to a third-party trustee, often a specialized attorney or title company, in agreement with the lender. If the borrower stops paying on the loan as required by the agreement with the lender, the trustee can foreclose on the property on behalf of the lender.
Like a mortgage deed, a deed of trust is filed at a county or city registry. When the loan is successfully paid off, a document called a deed of reconveyance is typically filed by confirming that the lender no longer has an interest in the property and formally granting ownership in full to the landowner.
Deeds of Trust and Foreclosure
This process is regulated by state law and exactly how it works varies from state-to-state. Generally, deed of trust foreclosures do not require court action. Borrowers can file lawsuits to halt or challenge foreclosures as with other contract dispute, but they must have some legal basis for doing so, such as if the lender isn't adhering to the terms of the agreement or the lender or trustee is breaking state law.
Lenders often prefer to use deeds of trust because foreclosure can be faster or cheaper without the courts getting involved, though borrowers may prefer the protections offered by having the courts involved. If you are involved in foreclosure in any state, it can be a good idea to contact a lawyer.
Lawyers can also help negotiate loan modification agreements that enable borrowers to stay in their houses and avert foreclosure under new loan terms. This can be beneficial to lenders, as well, since they don't have to go through the foreclosure process and hope for a buyer for the property.
The Colorado Public Trustee System
Colorado has a unique system for handling deeds of trust. It was put into place following reported foreclosure abuses by lenders in the early days of the state.
Rather than properties being held in trust by for-profit entities like law offices and title companies, deeds of trust are arranged with officials called public trustees. There is one for each county in the state.
In the event of a foreclosure, the public trustee is supposed to work with borrowers and lenders as a neutral and independent party. The trustee also manages the property sale if the foreclosure comes to that point.
- Findlaw: What Are Property Deeds?
- Cornell Legal Information Institute: Mortgage
- Cornell Legal Information Institute: Deed of Trust
- Lending Tree: Mortgage Note
- Investopedia: Satisfaction of Mortgage
- Nolo: What's the Difference Between a Mortgage and Deed of Trust?
- Durango Herald: Colorado's Unique System of Public Trustee
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.