What Is a Perfected Mortgage?

A perfected mortgage helps protect a lender in bankruptcy cases.
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Borrowing money to buy real estate typically requires the borrower to get a mortgage loan from a lender. In return, the lender receives a signed mortgage trust deed. The mortgage becomes "perfected" when the lender files documentation with the proper county legal authority where the property is located. The documentation serves as a public declaration of the lender's "secured lien" against the real estate.

Time Frame

Mistakes in the perfecting process can create costly problems for lenders, particularly when a borrower files for bankruptcy protection. One of the more common perfecting mistakes is failure to act in a timely manner. The Bankruptcy Code grants a 30-day grace period from the date of closing, or transfer of property, to perfect a mortgage in order for the security interest to be effective from the date of closing.

Mortgages perfected after the grace period become effective as of the date they are perfected. Secured lenders have lost their secured interest positions to other creditors in bankruptcy proceeding because of failure to act within the grace period.

Filing Process

Lenders can also lose their secured interests to other creditors in bankruptcy filings because of mistakes or omissions in the mortgage-perfecting filing process and documents. For example, flawed legal descriptions of mortgaged properties, in terms of property location and physical description, can hurt lenders. Failure to file in the correct county or with the correct legal authority will create unwanted surprises for lenders in bankruptcy proceedings.

Some states treat mobile homes as personal property rather than real estate. These states have different perfecting procedures for mobile homes, which frequently involve a state's department of motor vehicles or equivalent agency. If you're perfecting a mortgage on a mobile home, check to see if your state treats mobile homes as real estate or personal property.

Owner Financing

Owner financing is a popular financing option for buyers and sellers in tight credit markets, where buyers have difficulty obtaining conventional mortgages. According to the website of Dancik Capital Group, a mortgage note-factoring company, "It has been estimated that about 10 percent to 15 percent of property sold is now sold with seller financing" since 2007.

If you're considering owner financing as a buyer incentive for real estate you're trying to sell, you face the same risk of losing your secured interest in a bankruptcy proceeding as commercial lenders do. This can occur if you fail to perfect your mortgage lien in a timely manner or make errors and omissions in the documentation.

Closing the Sale

Get an attorney or use a title company to represent your interests at closing. You need professional help in the creation and execution of mortgage and financing documents, including the mortgage lien. Record these documents with your local county register of deeds or other appropriate authority immediately after closing to protect your interests.

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