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When you take out a mortgage, you’ll sign a stack of legal paperwork to seal the deal. One of these documents will be known as a security instrument — typically either a deed of trust or a mortgage.
These two legal documents serve essentially the same purpose: Both give the lender the ability to repossess your home by foreclosure if you fail to make your payments. However, there are some key differences.
The Two Key Documents in a Mortgage Loan
When you take out a mortgage loan to buy a home, there are two critical legal documents involved – the mortgage (or deed of trust) and the promissory note. These legal contracts specify the terms of the loan and the rights of both the borrower and lender. Understanding what each document covers is important for homebuyers.
The Mortgage or Deed of Trust
The mortgage, also called the deed of trust in some states, is the document that formally pledges your house as collateral for the loan. Here are key details about the mortgage contract:
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Legal right to foreclose The mortgage gives the lender the legal right to foreclose on your home if you default on the loan Foreclosure is the process where the lender can seize and sell your home to recover the unpaid balance,
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Repayment terms: The mortgage lays out the principal amount being borrowed, the interest rate, monthly payments, and loan repayment term. This includes details like the maturity date when the full balance must be paid.
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Property rights transfer: When you sign the mortgage, you legally transfer certain property rights to the lender until the loan is paid off. This includes the right to sell the home if needed to repay the debt.
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Loan accelerations: Conditions where the full balance becomes due immediately are outlined, such as if you default on payments.
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Escrow account: If required, escrow for paying property taxes and insurance is described in the mortgage contract.
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Late fees: Charges for late payments are specified in the document.
As you can see, the mortgage gives the lender significant legal protections including the ability to take the home through foreclosure if needed. Homebuyers should understand these implications before signing the mortgage contract.
The Promissory Note
The second major document is the promissory note, sometimes called just the “note.” This is the legal IOU that contains your specific promise to repay the money borrowed from the lender. Here are key details about the promissory note:
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Loan amount: The note states the exact amount of money being borrowed, such as $200,000.
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Interest rate: The interest rate is specified, for example 4.5%.
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Payment schedule: Details on monthly principal and interest payments, when they are due each month, and the total number of payments over the loan term are outlined.
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Prepayment: Whether prepaying the loan ahead of schedule is allowed and any penalties are covered.
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Late fees: The charges imposed for late loan payments are defined.
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Acceleration clause: The note repeats the acceleration conditions described in the mortgage, where the full balance becomes due immediately.
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Default provisions: What constitutes default, such as failing to make payments, is detailed along with the lender’s remedies.
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Governing state law: The state laws that govern the contract terms are specified.
The promissory note contains your specific promises as the borrower to repay principal, interest, fees, and other costs under the agreed loan terms. Signing it makes you legally obligated to make good on those promises.
Key Differences Between the Mortgage and Note
While the mortgage and note are closely connected, there are some important differences homebuyers should be aware of:
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The mortgage specifically involves the home as collateral while the note covers the money owed.
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The note details repayment terms but the mortgage covers foreclosure rights and procedures.
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The note is focused on obligations of the borrower while the mortgage grants legal rights to the lender.
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Ownership of the note can be transferred to investors while the mortgage stays with the original lender.
Why Two Separate Documents are Used
You may be wondering why a mortgage loan requires two separate contracts instead of being combined into one. Here are some key reasons:
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It allows ownership of the note to be sold to investors as a security without transferring the mortgage itself. This is known as securitization and is a common practice.
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The note can function on its own as a legal IOU even if there are issues with the mortgage document.
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If the lender fails to properly transfer ownership of the mortgage, they still have evidence of the underlying debt with the note.
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In the event of a dispute over terms, having two documents helps in matters of legal evidence and proof.
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If ownership of the mortgage is successfully challenged, the debt obligation remains legally valid through the note.
So executing two individual contracts better protects the interests of both lender and borrower while facilitating broader financial activities like selling mortgage-backed securities to investors.
What Happens to the Mortgage and Note After Closing
Once you go through the closing process and the mortgage loan is funded, the original mortgage and note documents are typically sent to different places:
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The mortgage goes to the county recorder’s office to be officially recorded in public records, making the home collateral for the loan. This is important for establishing lien position and foreclosure rights.
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The original promissory note is endorsed to a mortgage servicing company who is responsible for administering the loan on behalf of the lender. They collect payments, manage escrow accounts, and handle other tasks.
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The lender retains copies of both documents in their records. Digital copies are typical today rather than paper versions.
So in general after closing, the mortgage is publicly filed with the county and accessible by anyone while the note goes to the servicer who manages the account. The lender keeps copies of both.
What Happens if the Mortgage and Note Get Separated?
Since the mortgage and note work closely together, you may wonder what happens if ownership gets separated between two different entities through transfers, sales, or other issues. This is an area of legal complexity but a few key points:
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Whoever rightfully owns both has the strongest legal position to enforce the debt through foreclosure. This is known as having the mortgage “follow” the note.
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If they become completely separated, it creates an opportunity for a borrower to challenge standing to foreclose. This can delay or derail foreclosure but does not eliminate the underlying debt.
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Courts attempt to determine true ownership intent and will reunite the note and mortgage if relationship and transfers can be established.
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While tricky, separation does not automatically relieve the borrower of having to repay the loan. But it can help them resist foreclosure temporarily.
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Ultimately it’s in the lender’s interests to keep the note and mortgage together to clearly maintain enforcement rights.
So if ownership of the mortgage and promissory note gets muddied or confused through mismanagement of transfers, it can create potential legal issues down the road. But it does not invalidate the core debtor-creditor relationship created at closing. Borrowers still owe the money that was lent.
How Technology is Modernizing the Mortgage Process
One final note is that technology is modernizing how mortgage loans are transacted and documented, both at closing and ongoing administration:
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eClosing platforms allow documents to be reviewed and signed digitally without paper copies. This includes eNotes and eMortgages.
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Blockchain-based systems create a permanent digital record of transactions and ownership transfers for notes and mortgages.
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Cloud-based loan servicing systems store documents online and automate tasks like payment processing.
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Borrowers can often access their mortgage and note 24/7 through secure online portals for transparency.
So while the core purpose remains the same, technology is improving convenience, efficiency and transparency for many aspects of the mortgage process. This trend will likely continue as adoption increases.
The Bottom Line
When you take out a mortgage loan, you sign both a mortgage (or deed of trust) and a promissory note that work together to document the transaction. The mortgage specifically pledges the home as collateral and gives foreclosure rights while the note covers your legal obligation as borrower to repay the money. Understanding the role and relationship between these two important legal contracts is essential for every homebuyer. Be sure to carefully review both documents before signing when you purchase a home.
What is in a mortgage or deed of trust?
Since mortgages and deeds of trust are so similar, there are many common elements between the two documents.
Both a mortgage and a deed of trust will usually begin by specifying the name of the lender, the borrower, and the date on which the contract was signed. The deed of trust will also include the name of the trustee.
Other items you’ll find in both a mortgage and deed of trust:
- Amount owed: This is the total amount of the home loan, the amount you must pay back with interest.
- Address of the property: This is the location of the home you are purchasing.
- How payments are handled: The mortgage or deed of trust will usually specify how payments can be made, how the payments are applied (typically to interest first and then principal), how partial payments are handled, and what happens if a payment is late.
- Insurance requirements: Most lenders require you to carry a homeowner’s insurance policy in the event of a fire or other disaster.
- Occupancy requirements: Some loan programs require that you live in the home for a certain period of time as your primary residence to qualify. This will be outlined in the mortgage or deed of trust.
- Prohibitions: This usually includes rules that prevent you from keeping hazardous substances in your home.
Deed of trust vs. mortgage
Both a deed of trust and a mortgage have several things in common, but there are also some crucial differences to note.
- Number of parties: With a mortgage, there are just two parties — you and your lender. Under a deed of trust, there are three: you, your lender, and a trustee (often a title company).
- Foreclosure process: Mortgages typically go through a judicial foreclosure process, through your county court system. Deeds of trust use a non-judicial foreclosure process.
- Length of time to foreclose: Mortgage foreclosures usually take significantly longer than non-judicial foreclosures with a deed of trust. That means you as a homeowner have a longer period of time to get caught up with your payments under a mortgage before you lose your home.
- Security for the lender: With both documents, the mortgage lender has a security interest in your home until you fully pay the company back.
- Ability to foreclose: Both a deed of trust and a mortgage spell out a process by which the lender can foreclose on the home and repossess it in the event that you fail to make your payments.
- End point: With both documents, the security instrument is released once you fully repay your mortgage.
The Mortgage Loan Process – Step 2 – Documents
FAQ
What are the two main documents in a mortgage?
What are the two parts of a mortgage loan?
What two documents make up what is commonly referred to as a mortgage loan?
What is mortgage documentation & paperwork?
Understanding mortgage documentation and paperwork is a critical step in the home buying process. These documents contain vital information about your loan terms, payment schedules, and other financial obligations. A lack of understanding can lead to unexpected surprises, financial strain, and even legal issues down the line.
What documents are included in a mortgage application?
You’ll see some of the most important mortgage documents in this step, like your closing disclosure, homeowners insurance, loan application documents, deed and title. You’ll typically receive a closing disclosure three business days before you close. This itemized list shows amount, in total, you’ll pay at or before closing.
What documents do you need to buy a home?
Most people who take out a loan to buy a home sign two primary documents: a mortgage (or deed of trust) and a promissory note. By signing a promissory note, you promise to repay the borrowed amount, usually with monthly payments. Signing a mortgage allows the lender to get its money back if you don’t make those payments—through a foreclosure.
Do I need to read all mortgage documents?
Mortgages mean paperwork. But except for the most important, you don’t need to read or keep all of the mortgage loan documents you see. Here’s how the process normally goes, and how to deal with print fine and large.