Real Estate Law – Mortgages

Mortgages are the most common instrument for financing the acquisition of real estate. Generally the buyer or mortgager will give a mortgage to a lender, such as a bank and savings and loan. The mortgage gives the lender the legal right to file suit in court to foreclose the buyer’s ownership rights in the property in the event loan payments are not made as promised. After the suit is initiated and the judge hears evidence, the judge issues a decree of foreclosure.

After the decree is issued, a sheriff’s sale occurs and property is auctioned off to the highest bidder. The money received from the sheriff’s sale, is used to repay the debt owed the lender. If the money received exceeds the debt, the surplus goes to the mortgagor. If the money is not sufficient to pay the debt, the lender can usually obtain a deficiency judgment against the borrower for the balance due.

Mortgagors are protected in most states with rights of redemption. Prior to the decree of foreclosure. The mortgager can sometimes stop the foreclosure process by simply paying all past-due installments along with those expenses incurred by the lender because of the default. The ability to stop foreclosure is generally called the “statutory redemption.”

After the decree of foreclosure is issued, the mortgagor is still protected in a majority of the states by redemption. Usually six months to a year. During which he or she can regain the property by paying off the whole amount of the mortgage. Along with the lender’s default expenses. This generally called the right of “statutory redemption.” Mortgages sometimes contain clauses which waive rights of redemption. Generally these clauses cannot be enforced.

The process of mortgage foreclose is usually very time consuming. The delays associated with the suit, sheriff’s sale, and possible redemption can often delay the sale for one or two years.

Trust deeds are a method of financing the buyer first obtains the deed from the seller. The buyer then gives a trust deed to a trustee. The trust deed contains language which allows the trustee to sell the property if the buyer defaults on the loan payments. Note that a court order is not required to cause the sale and that is a sale conducted by the trustee rather than by the sheriff.

In some states there is no redemption periods associated with trust deeds or they are very short. For these reasons, sale after the default often occurs more rapidly under a trust deed than under a mortgage. Therefore, lenders frequently prefer trust deeds to mortgages.

A mortgage with “power of sale” is similar to a rust deed. No foreclosure suit is required and a private sale occurs. This sale is conducted by the mortgagee. Some states do not permit mortgages with power of sale. And those states which do permit them carefully regulate by statue the conduct of the lender after default.