If you are going through the steps of selling your home and then buying another, you might be a bit rusty on the legal jargon of real estate transactions. When you are purchasing a home, for example, you are required to sign two different documents by the lender: the promissory note and the mortgage deed of trust. But which is which and what is the difference? This article will detail the difference of the two documents and how they are handled.
What is a promissory note?
A lot of home buyers think that the mortgage deed of trust contains the information stating that you are borrowing a certain sum of money from a lender that must be repaid. However, it is actually the promissory note that is serves as a legal, binding "I owe you" between you and your lender.
A promissory note contains your legal name as the borrower, the address of the property in question, interest rate, and the term and amount of the loan along with late charges. This document is between you and the lender, so rather than being kept in the county records office, it is filed with the lender. When the loan is paid in full, the lender will state that the promissory note has been satisfied, and give the note back to the home owner.
What Is A Mortgage Or Deed Of Trust?
The mortgage is what gives some of the more gritty details that are going to back up the promissory note. This document is filed with the local records office and it contains the same information as the promissory note plus some extra information that talks about how the loan is to be handled.
To give you an example, the mortgage is what will give the details about how it is handled if payments are missed. It will usually have an acceleration notice that says that if you don't make the payments that the lender has the right to demand that full payment is due immediately to satisfy the promissory note. Most states mandate how a borrower is to be notified in a case when the acceleration clause has been activated.
Moreover, the mortgage can also detail foreclosure proceedings. If the home owner is unable to make payments for a length of time, it is detailed here as well that the lender can sell the house in order to satisfy the debt of the loan.
In this way, the mortgage contains all borrowers involved, the address of the property in question, and the loan and property itself described legally. When the loan is satisfied, the lender will add a release of mortgage, satisfaction of mortgage, and/or mortgage reconveyance notice to the county records stating that the loan has been repaid in full.
How are Deeds and Promissory Notes Transferred?
Many mortgages include terms that are several years long, as little as 5 years to even 50 years depending upon the conditions agreed upon. Thus, during the ownership of the property and the loan itself can change hands.
If a bank transfers a loan to another bank it is called an assignment, which is another form of sale. The assignment is another legal document that notes the transfer of property at the county records office and each, and every, time a property is transferred it is also recorded at the land records office as well.
When the loan changes hands between one owner and another this is called and endorsement, which is what happens when one buyer assumes a mortgage from another buyer. In these cases the promissory note is signed by both new and old owner saying that the new borrower is responsible for the amount owed on the house. In cases like mortgage assumption if the new buyer goes into default the bank may be able to go after the old owner for whatever is left on the debt that has not be repaid.
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