Let’s first define our terms. A mortgage is a financing arrangement in which the person buying a home or parcel of land (or one who already owns property) receives a loan, and the property is pledged as collateral to guarantee repayment of the loan.
A mortgage consists of two documents: a note and the mortgage itself.
The note makes the buyer personal responsible for the debt and is the buyer’s personal promise to repay the loan. If there is a foreclosure against the property and the foreclosure sale does not yield enough to cover the outstanding mortgage debt, the note serves as the basis for a deficiency judgment against the borrower for the balance still due. So it is the note that gives the lender the power to come after you personally for any outstanding balance in the event that the foreclosure and sale of the property does not payoff the outstanding balance on the mortgage
The mortgage gives the lender a security interest in the property that you are purchasing/refinancing. It is this document which gives the lender the ability to foreclose on your property and have it sold in the event of a default. The mortgage is recorded at the county clerk’s office.
Usually, when mortgaged property is sold the mortgage is paid off at the closing. But property can be sold without paying off the mortgage, either by having the purchaser take subject to the mortgage, or having the purchaser assume the mortgage.
A deed is the document that passes the title from the grantor (seller) to the grantee (buyer). There are three basic types of deeds. A quit claim deed passes whatever title or rights the grantor has in the property to the grantee and provides no warranties of any kind from the Seller. A warrantee deed contains promises made by the grantor about the title or rights conveyed. There are two types of warrantee deeds, General Warranty Deeds and Special / Limited Warrantee Deeds.
A deed must contain specific formalities, including the legal description of the property, and must be executed (signed in front of a notary public in most states), and delivered to the grantee. This two-paragraph description of a deed barely summarizes deeds and their importance in property law. Consult with an attorney in your state to learn more.
If the borrower fails to make the monthly mortgage payments and defaults on the mortgage, the lender may force the sale of the property to satisfy the debt. In some states this is accomplished with a a judicial foreclosure. This is a lawsuit in which the mortgagor is evicted and the property is sold under the supervision of a government official, such as a sheriff. A judicial foreclosure can start 120 to 180 days following a default. Ohio is a judicial foreclosure state.
Deed of Trust
In some states, deeds of trust are used instead of mortgages. In those states, the trustee holds the deed in favor of the lender and then reconveys the title to the borrower when the loan is paid in full. Sometimes called a trust deed.
California and Massachusetts are two states where home loans are handled with deeds of trust instead of mortgages. However, the term “mortgage” is so ingrained in our vocabulary that almost everyone says “mortgage” when the legal instrument may be a deed of trust.
A deed of trust allows the trustee to sell the property in a private sale if the borrower defaults. The private sale must occur in a commercially reasonable manner so as to bring the highest price possible. A private sale may occur as soon as 60 days following a default.
If you are behind on mortgage payments and contemplating bankruptcy, it is important to understand that the mortgage is not dischargeable. If you are hoping to keep your house, you will have to cure any default and continue to make regular payments. If you do not, the lender has the right to petition the court to be removed from the bankruptcy and to proceed with a foreclosure/sale. But let’s say you decide you do not want to keep the property. You want to walk away and get a fresh start, also known as a Strategic Default. Here is where it is important to recognize the difference between the two legal documents; while your mortgage cannot be discharged in bankruptcy, your note (i.e. personal obligation for the debt) is. That means that by filing bankruptcy, you limit the lender’s remedy to the sale of the property. The lender gets whatever the property is worth up to the amount remaining on the mortgage, and you get to walk away with no remaining obligation to the lender.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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