LEARNING OBJECTIVES
 When you've finished reading this Chapter, you should be able to:
► identify the basic provisions of security and debt instruments: promissory notes, mortgage documents, deeds of trust, and land contracts.
► describe the effect of discount points on yield.
► explain the procedures involved in a foreclosure.
► distinguish between lien and title theories and among the three methods of foreclosure.
► define the following terms: acceleration clause; alienation clause; assume; beneficiary; deed in lieu of foreclosure; deed of trust; defeasance clause; deficiency judgment; discount points; equitable right of redemption; foreclosure; hypothecation; interest; lien theory; loan origination fee; mortgage; mortgagee; mortgagor; negotiable instrument; note; novation; owner financing; prepayment penalty; promissory note; release deed; satisfaction; statutory right of redemption; subject to; title theory; trustor; and usury.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---
I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

WHY LEARN ABOUT... REAL ESTATE FINANCING PRINCIPLES?
Perhaps the most important investment decision your clients will ever make is the one you help them with: buying a home. In the United States, relatively few homes are purchased for cash. Most homes are bought with borrowed money, and a huge lending industry has been built to service the financial requirements of homebuyers. In addition, by altering the terms of the basic mortgage or deed of trust and note, a borrower and a lender can tailor financing instruments to suit the type of transaction and the financial needs of both parties. In Chapter 14 and 15, you will learn about the basic tools, concepts, and procedures involved in financing a real estate transaction.

These two Chapters will help you understand how to guide your customers through a process that enables them to buy (or sell) their property. You can be a marketing genius and an excellent agent, adhere to fair housing practices, and have the best listing agreements in the world, but if the buyer can't get the money to buy the property, none of your other skills will matter. To close the deal, a licensee has to be able to do the numbers.

Although being knowledgeable about financing is important, licensees usually refer customers to lenders to get them preapproved for loans.

 MORTGAGE LAW
A mortgage is a voluntary lien on real estate, that is, a person who borrows money to buy a piece of property voluntarily gives the lender the right to take that property if the borrower fails to repay the loan. The borrower, or mortgagor, pledges the property to the lender, or mortgagee, as security or collateral for the debt. Exactly what rights the mortgagor gives the mortgagee, however, varies from state to state.

In title theory states, the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title. Legal title is returned to the mortgagor only when the debt is paid in full (or some other obligation is performed). In theory, the lender actually owns the property until the debt is paid. The lender allows the borrower all the usual rights of ownership, such as possession and use. In effect, because the lender actually holds legal title, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults.

In lien theory states, the mortgagor retains both legal and equitable title. The mortgagee simply has a lien on the property as security for the mortgage debt. The mortgage, or deed of trust, is nothing more than collateral for the loan. If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding to obtain legal title. The property is offered for sale at public auction, and the funds from the sale are used to pay the balance of the remaining debt. In some states, a defaulting mortgagor may redeem (buy back) the property during a certain period after the sale. A borrower who fails to redeem the property during that time loses the property irrevocably.

A number of states have adopted an intermediate theory that is based on the principles of title theory but requires that the mortgagee foreclose to obtain legal title.

IN PRACTICE      In reality, the differences between the parties' rights in a lien theory state and those in a title theory state are more technical than actual. Regardless of the theory practiced in any particular state, all borrowers and (enders observe the same general requirements to protect themselves in a loan transaction. Real estate loans are formal contracts that need to be in writing and include a description of the property pledged as collateral and a complete statement describing how the loan will be repaid. As with any contract, the parties must be legally competent, their signatures valid and attested, and adequate consideration exchanged.

 SECURITY AND DEBT
A basic principle of property law is that no one can convey more than he or she actually owns. This principle also applies to mortgages. The owner of a fee simple estate can mortgage the fee. The owner of a leasehold or subleasehold can mortgage that leasehold interest. The owner of a condominium unit can mortgage the fee interest in the condominium. Even the owner of a cooperative interest may be able to offer that personal property interest as collateral for a loan.

Mortgage Loan Instruments
There are two parts to a mortgage loan: the debt itself and the security for the debt. When a property is to be mortgaged, the owner must execute (sign) two separate instruments:
     1) The promissory note, also referred to simply as the note or financing instrument, is the borrower's personal promise to repay a debt according to agreed-upon terms. The note exposes all of the borrower's assets to claims by creditors. The mortgagor executes one or more promissory notes to total the amount of the debt.
     2) The mortgage (or deed of trust, discussed below) also is known as the security instrument. The security instrument creates the lien on the property. The mortgage allows the lender to sue for foreclosure in the event the borrower defaults.

Hypothecation is the term used to describe the pledging of property as security for payment of a loan without actually surrendering possession of the property. A pledge of security—a mortgage or deed of trust—cannot be legally effective unless there is a debt to secure. Both a note and a mortgage are executed to create a secured loan.

Deeds of trust. In some situations, lenders may prefer to use a three-party instrument known as a deed of trust, or trust deed, rather than a mortgage. A trust deed conveys naked title or bare legal title, that is, title without the right of possession. The deed is given as security for the loan to a third party, called the trustee. The trustee holds bare title on behalf of the lender, who is known as the beneficiary. The beneficiary is the holder of the note. The conveyance establishes the actions that the trustee may take if the borrower, the trustor, defaults under any of the deed of trust terms. In states where deeds of trust are generally preferred, foreclosure procedures for default are usually simpler and faster than for mortgage loans.

Usually, the lender chooses the trustee and reserves the right to substitute trustees in the event of death or dismissal. State law usually dictates who may serve as trustee. Although the deed of trust is particularly popular in certain states, it is used all over the country. For example, in the financing of a commercial or an industrial real estate venture that involves a large loan and several lenders, the borrower generally executes a single deed of trust to secure as many notes as necessary.

 PROVISIONS OF THE NOTE
A promissory note executed by a borrower (known as the maker or payor) is a contract complete in itself. It generally states the amount of the debt, the time and method of payment, and the rate of interest. When signed by the borrowers and other necessary parties, the note becomes a legally enforceable and fully negotiable instrument of debt. When the terms of the note are satisfied, the debt is discharged. If the terms of the note are not met, the lender may choose to sue to collect on the note or to foreclose.

A note need can not be tied to a mortgage or deed of trust. A note used as a debt instrument without any related collateral is called an unsecured note. Unsecured notes are used by banks and other lenders to extend short-term personal loans. However, a real estate loan is a secured loan and always includes security, i.e., a mortgage or deed of trust.

If a note is used with a mortgage, it names the lender (mortgagee) as the payee; if it is used with a deed of trust, the note may be made payable to the bearer. The note may also refer to or repeat several of the clauses that appear in the mortgage document or deed of trust. The note, like the mortgage or deed of trust, should be signed by all parties who have an interest in the property. In states where dower and curtesy are in effect or where homestead or community property is involved, both spouses may have interests in the property, and both should sign the note and mortgage.

A note is a negotiable instrument like a check or bank draft. The lender who holds the note is referred to as the payee, and may transfer the right to receive payment to a third party in one of two ways:
1) By signing the instrument over (that is, by assigning it) to the third party
2) By delivering the instrument to the third party

IN PRACTICE      All notes should be clearly dated. Accurate dates are essential because time is of the essence" in every real estate contract. Also, the dates of the notes may be necessary to determine the chronological order of priority rights.

A charge for using money is called interest. Interest may be due at either the end or the beginning of each payment period. When payments are made at the end of a period, it is known as payment in arrears. This is the general practice, and mortgages often call for end-of-period payments due on the first of the following month. Payments may also be made at the beginning of each period, however, when it is known as payment in advance. Whether interest is charged in arrears or in advance is specified in the note. This distinction is important if the property is sold before the debt is repaid in full.

Usury.
To protect consumers from unscrupulous lenders, many states have enacted laws limiting the interest rate that may be charged on loans. In some states, the legal maximum rate is a fixed amount. In others, it is a floating interest rate, which is adjusted up or down at specific intervals based on a certain economic standard, such as the prime lending rate or the rate of return on government bonds.

Whichever approach is taken, charging interest in excess of the maximum rate is called usury, and lenders are penalized for making usurious loans. In some states, a lender that makes a usurious loan is permitted to collect the borrowed money, but only at the legal rate of interest. In others, a usurious lender may lose the right to collect any interest or may lose the entire amount of the loan in addition to the interest.
 
Loan origination fee.
The processing of a mortgage application is known as loan origination. When a mortgage loan is originated, a loan origination fee, or transfer fee, is charged by most lenders to cover the expenses involved in generating the loan. These include the loan officer's salary, paperwork, and the lender's other costs of doing business. A loan origination fee is not prepaid interest; rather, it is a charge that must be paid to the lender. The typical loan origination fee is 1 percent of the loan amount, although origination fees may range from one to three points (a point equals 1 percent of the loan amount).

IN PRACTICE  Because many real estate loans are made by private loan companies that may not be covered by federal regulations, it is important that borrowers insist on receiving a statement in advance from their lender that clearly states the total amount of the loan closing costs and the effective interest rate to avoid unpleasant surprises at closing. This good-faith estimate is required by the Real Estate Settlement Procedures Act (RESPA). The good-faith estimate is discussed more fully in Chapter 22.

Discount points.
A lender may sell a mortgage to investors (as discussed later in this Chapter). However, the interest rate that a lender charges for a loan might be less than the yield (true rate of return) an investor demands. To make up the difference, the lender charges the borrower discount points. The number of points charged depends on two factors:
1) The difference between the interest rate and the required yield
2) How long the lender expects it will take the borrower to pay off the loan

For the borrowers, one discount point equals 1 percent of the loan amount and is charged as prepaid interest at the closing. For instance, three discount points charged on a $100,000 loan would be $3,000 ($100,000 x 3%, or .03). If a house sells for $100,000 and the borrower seeks an $80,000 loan, each point would be $800, not $1,000. In some cases, however, the points in a new acquisition may be paid in cash at closing by the buyer (or, of course, by the seller on the buyer's behalf) rather than being financed as part of the total loan amount.

Most mortgage loans are paid in installments over a long period of time. As a result, the total interest paid by the borrower may add up to more than the principal amount of the loan. That does not come as a surprise to the lender; the total amount of accrued interest is carefully calculated during the origination phase to determine the profitability of each loan. If the borrower repays the loan before the end of the term, the lender collects less than the anticipated interest. For this reason, some mortgage notes contain a prepayment clause. This clause requires that the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule.

The penalty may be as little as 1 percent of the balance due at the time of pre-payment or as much as all the interest due for the first ten years of the loan. Some lenders allow the borrower to pay off a certain percentage of the original loan without paying a penalty. However, if the loan is paid in full, the borrower may be charged a percentage of the principal paid in excess of that allowance. Lenders may not charge prepayment penalties on mortgage loans insured or guaranteed by the federal government or on those loans which have been sold to Fannie Mae or Freddie Mac. Also, some states prohibit prepayment penalties on all mortgage loans.
 
IN PRACTICE   Some states limit the amount of prepayment penalty lenders may impose, while others prohibit lenders from charging any penalty at all on prepaid residential mortgage or deed of trust loans. Some states allow lenders to charge a prepayment penalty only if the loan is paid off with funds borrowed from another source.

 PROVISIONS OF THE MORTGAGE DOCUMENT OR DEED OF TRUST
The mortgage document or deed of trust clearly establishes that the property is security for a debt, identifies the lender and the borrower, and includes an accurate legal description of the property. Both the mortgage document and deed of trust incorporate the terms of the note by reference. They should be signed by all parties who have an interest in the real estate. Common provisions of both instruments are discussed below.

Duties of the Mortgagor or Trustor
The borrower is required to fulfill certain obligations. These usually include the following:
► Payment of the debt in accordance with the terms of the note
► Payment of all real estate taxes on the property given as security
► Maintenance of adequate insurance to protect the lender if the property is
destroyed or damaged by fire, windstorm, or other hazard
► Maintenance of the property in good repair at all times
► Receipt of lender authorization before making any major alterations on the property

Failure to meet any of these obligations can result in a borrower's default. The loan documents may, however, provide for a grace period (such as 30 days) during which the borrower can meet the obligation and cure the default. If the borrower does not do so, the lender has the right to foreclose the mortgage or deed of trust and collect on the note.
 
Provisions for Default
The mortgage or deed of trust typically includes an acceleration clause to assist the lender in foreclosure. If a borrower defaults, the lender has the right to accelerate the maturity of the debt. This means the lender may declare the entire debt due and payable immediately. Without an acceleration clause, the lender would have to sue the borrower every time a payment was overdue.

Other clauses in a mortgage or deed of trust enable the lender to take care of the property in the event of the borrower's negligence or default. If the borrower does not pay taxes or insurance premiums or fails to make necessary repairs on the property, the lender may step in and do so. The lender has the power to protect the security (the real estate). Any money advanced by the lender to cure a default may be either added to the unpaid debt or declared immediately due from the borrower.

Assignment of the Mortgage
As mentioned previously, without changing the provisions of a contract, a note may be sold to a third party, such as an investor or another mortgage company. The original mortgagee endorses the note to the third party and executes an assignment of mortgage. The assignee becomes the new owner of the debt and security instrument. When the debt is paid in full (or satisfied), the assignee is required to execute the satisfaction (or release) of the security instrument.

Release of the Mortgage Lien or Deed of Trust
When all loan payments have been made and the note has been paid in full, the borrower will want the public record to show that the debt has been satisfied and that the lender is divested of all rights conveyed under the mortgage or deed of trust. By the provisions of the defeasance clause in the document, the lender is required to execute a satisfaction (also known as a release or discharge) when the note has been fully paid. This document returns to the borrower all interest in the real estate originally conveyed to the lender. Entering this release in the public record shows that the debt has been removed from the property.

If a mortgage or deed of trust has been assigned by a recorded assignment, the release must be executed by the assignee or mortgagee.

When a real estate loan secured by a deed of trust has been completely repaid, the beneficiary must make a written request that the trustee convey the property back to the grantor. The trustee executes and delivers a release deed (sometimes called a deed of reconveyance) to the trustor. The release deed conveys the same rights and powers that the trustee was given under the trust deed. The release deed should be acknowledged and recorded in the public records of the county in which the property is located.

Tax and Insurance Reserves
Many lenders require that borrowers provide a reserve fund to meet future real estate taxes and property insurance premiums. This fund is called an impound, a trust, or an escrow account. When the mortgage or deed of trust loan is made, the borrower starts the reserve by depositing funds to cover the amount of unpaid real estate taxes. If a new insurance policy has just been purchased, the insurance premium reserve will be started with the deposit of one-twelfth of the insurance premium liability. The borrower's monthly loan payments will include principal, interest, tax, and insurance reserves, and sometimes other costs, such as flood insurance or homeowners' association dues. RESPA, the federal Real Estate Settlement Procedures Act (discussed in Chapter 22), limits the total amount of reserves that a lender may require.

Flood insurance reserves. The National Flood Insurance Reform Act of 1994 imposes certain mandatory obligations on lenders and loan servicers to set aside (escrow) funds for flood insurance on new loans for property in flood-prone areas. However, the act also applies to any loan still outstanding on October 1, 1996. This means that if a lender or servicer discovers that a secured property is in a flood hazard area, it must notify the borrower. The borrower then has 45 days to purchase flood insurance. If the borrower fails to procure flood insurance, the lender must purchase the insurance on the borrower's behalf. The cost of the insurance may be charged back to the borrower.

Assignments of Rents
If the property involved includes rental units, the borrower may provide for rents to be assigned to the lender in the event of the borrower's default. The assignment may be included in the mortgage or deed of trust, or it may be a separate document. In either case, the assignment should clearly indicate that the borrower intends to assign the rents, not merely pledge them as security for the loan. In title theory states, lenders are automatically entitled to any rents if the borrower defaults.

Buying Subject to or Assuming a Seller’s Mortgage or Deed of Trust
When a person purchases real estate that has an outstanding mortgage or deed of trust, the buyer may take the property in one of two ways. The property may be purchased subject to the mortgage or deed of trust, or the buyer may assume the mortgage or deed of trust and agree to pay the debt. This technical distinction becomes important if the buyer defaults and the mortgage or deed of trust is foreclosed.

When the property is sold subject to the mortgage, the buyer is not personally obligated to pay the debt in full. The buyer takes title to the real estate knowing that he or she must make payments on the existing loan. Upon default, the lender forecloses and the property is sold by court order to pay the debt. If the sale does not pay off the entire debt, the purchaser is not liable for the difference. In some circumstances, however, the original seller might continue to be liable.

 FOR EXAMPLE     Robert owns an investment rental property that carries a mortgage. For health reasons, he wants to sell the property to Janet who has been managing the property and who also wants to use the rental property as an investment. Robert sells the property to Janet subject to the mortgage. In the sale, Janet takes title and assumes responsibilities for the loan, but after two months she can no longer make payments on the loan. There is a foreclosure sale and because Robert sold the property subject to the mortgage, Robert (not Janet) is personally liable if proceeds from the foreclosure sale do not meet the obligations.

In contrast, a buyer who purchases the property and assumes the seller's debt becomes personally obligated for the payment of the entire debt. If the debt is foreclosed and the court sale does not bring enough money to pay the debt in full, a deficiency judgment against the assumer and the original borrower may be obtained for the unpaid balance of the note. If the original borrower has been released by the assumer, only the assumer is liable.
 
 FOR EXAMPLE  When Judy bought her house a short time ago, interest rates were very low. Now, Judy has been unexpectedly transferred out of the country and needs to sell the house quickly. Because interest rates have risen dramatically since the time of Judy's loan, buyers may be attracted by the prospect of assuming Judy's mortgage. Clearly, if a buyer were to take out a mortgage now, the rate would be higher and the cost of home ownership would be increased. By assuming an existing loan with a more favorable interest rate, a buyer can save money.

The existence of a lien does not prevent the transfer of property; however, when a mortgage is assumed, the mortgagee must approve the release of liability of the original mortgagor. Because a loan may not be assumed without lender approval, the lending institution would require the assumer to qualify financially, and many lending institutions charge a transfer fee to cover the costs of changing the records. This charge usually is paid by the purchaser.

Alienation clause. The lender may want to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low. For this reason, most lenders include an alienation clause (also known as a resale clause, due-on-sale clause, or call clause) in the note. An alienation clause provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender. Land contracts that involve a dueon-on-sale clause also limit the assumption of the contract.

Recording a Mortgage or Deed of Trust
The mortgage document or deed of trust must be recorded in the recorder's office of the county in which the real estate is located. Recording gives constructive notice to the world of the borrower's obligations. Recording also establishes the lien's priority, as discussed in Chapter 10. If the property is registered in the Torrens system, notice of the lien must be entered on the original Torrens certificate.

Priority of a Mortgage or Deed of Trust
Priority of mortgages and other liens normally is determined by the order in which they were recorded. A mortgage or deed of trust on land that has no prior mortgage lien is a first mortgage or deed of trust. If the owner later executes another loan for additional funds, the new loan becomes a second mortgage or deed of trust (or a junior lien) when it is recorded. The second lien is subject to the first lien; the first has prior claim to the value of the land pledged as security. Because second loans represent greater risk to the lender, they are usually issued at higher interest rates.

The priority of mortgage or deed of trust liens may be changed by a subordination agreement, in which the first lender subordinates its lien to that of the second lender. To be valid, such an agreement must be signed by both lenders.

 PROVISIONS OF LAND CONTRACTS
As discussed in Chapter 11, real estate can be purchased under a land contract, also known as a contract for deed or an installment contract. Real estate is usually sold on contract for specific financial reasons. For instance, mortgage financing may be unavailable to a borrower for some reason. High interest rates may make borrowing too expensive. Or the purchaser may not have a sufficient down payment to cover the difference between a mortgage loan and the selling price.

Under a land contract, the buyer (called the vendee) agrees to make a down payment and a monthly loan payment that includes interest and principal. The payment also may include real estate tax and insurance reserves. The seller (called the vendor) retains legal title to the property during the contract term, and the buyer is granted equitable title and possession. At the end of the loan term, the seller delivers clear title. The contract usually permits the seller to evict the buyer in the event of default. In that case, the seller may keep any money the buyer has already paid, which is construed as rent. Many states now offer some legal protection to a defaulting buyer under a land contract.
 
 FORECLOSURE
When a borrower defaults on the payments or fails to fulfill any of the other obligations set forth in the mortgage or deed of trust, the lender's rights can be enforced through foreclosure. Foreclosure is a legal procedure in which property pledged as security is sold to satisfy the debt. The foreclosure procedure brings the rights of the parties and all junior lienholders to a conclusion. It passes title to either the person holding the mortgage document or deed of trust or to a third party who purchases the realty at a foreclosure sale. The purchaser could be the mortgagee. The property is sold free of the foreclosing mortgage and all junior liens.

Methods of Foreclosure
There are three general types of foreclosure proceedings—judicial, nonjudicial, and strict foreclosure. One, two, or all three may be available. The specific provisions and procedures for each vary from state to state.

Judicial foreclosure. Judicial foreclosure allows the property to be sold by court order after the mortgagee has given sufficient public notice. When a borrower defaults, the lender may accelerate the due date of all remaining monthly payments. The lender's attorney can then file a suit to foreclose the lien. After presentation of the facts in court, the property is ordered sold. A public sale is advertised and held, and the real estate is sold to the highest bidder.

Nonjudicial foreclosure. Some states allow nonjudicial foreclosure procedures to be used when the security instrument contains a power-of-sale clause. In non-judicial foreclosure, no court action is required. In those states that recognize deed of trust loans, the trustee is generally given the power of sale. Some states allow a similar power of sale to be used with a mortgage loan.

To institute a nonjudicial foreclosure, the trustee or mortgagee may be required to record a notice of default at the county recorder's office. The default must be recorded within a designated time period to give notice to the public of the intended auction. The notice is generally provided by newspaper advertisements that state the total amount due and the date of the public sale. After selling the property, the trustee or mortgagee may be required to file a copy of a notice of sale or an affidavit of foreclosure.
 
Strict foreclosure. Although judicial foreclosure is the prevalent practice, it is still possible in some states for a lender to acquire mortgaged property through a strict foreclosure process. First, appropriate notice must be given to the delinquent borrower. Once the proper papers have been prepared and recorded, the court establishes a deadline by which time the balance of the defaulted debt must be paid in full. If the borrower does not pay off the loan by that date, the court simply awards full legal title to the lender. No sale takes place.

Deed in Lieu of Foreclosure
As an alternative to foreclosure, a lender may accept a deed in lieu of foreclosure from the borrower. This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit. The major disadvantage of the deed in lieu is that the mortgagee takes the real estate subject to all junior liens. In a foreclosure action, all junior liens are eliminated. Also, by accepting a deed in lieu of foreclosure, the lender usually loses any rights pertaining to FHA or private mortgage insurance or VA guarantees. Finally, it should be pointed out that a deed in lieu of foreclosure is still considered an adverse element in the borrower's credit history.

Redemption
Most states give defaulting borrowers a chance to redeem their property through the equitable right of redemption. (See Chapter 10.) If, after default but before the foreclosure sale, the borrower (or any other person who has an interest in the real estate, such as another creditor) pays the lender the amount in default, plus costs, the debt will be reinstated. In some cases, the person who redeems may be required to repay the accelerated loan in full. If some person other than the mortgagor or trustor redeems the real estate, the borrower becomes responsible to that person for the amount of the redemption.

Certain states also allow defaulted borrowers a period in which to redeem their real estate after the sale. During this period (which may be as long as one year), the borrower has a statutory right of redemption. The mortgagor who can raise the necessary funds to redeem the property within the statutory period pays the redemption money to the court. Because the debt was paid from the proceeds of the sale, the borrower can take possession free and clear of the former defaulted loan. The court may appoint a receiver to take charge of the property, collect rents, and pay operating expenses during the redemption period.

Deed to Purchaser at Sale
If redemption is not made or if state law does not provide for a redemption period, the successful bidder at the sale receives a deed to the real estate. A sheriff or master-in-chancery executes this deed to the purchaser to convey whatever title the borrower had. The deed contains no warranties. Title passes as is but is free of the former defaulted debt.

Deficiency Judgment
The foreclosure sale may not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest. In this case, the mortgagee may be entitled to a personal judgment against the borrower for the unpaid balance. Such a judgment is a deficiency judgment. It may also be obtained against any endorsers or guarantors of the note and against any owners of the mortgaged property who assumed the debt by written agreement. However, if any money remains from the foreclosure sale after paying the debt and any other liens (such as a second mortgage or mechanic's lien), expenses, and interest, these proceeds are paid to the borrower.

 SUMMARY
Some states, known as title theory states, recognize the lender as the owner of mortgaged property. Others, known as lien theory states, recognize the borrower as the owner of mortgaged property. A few intermediate states recognize modified versions of these theories.

Mortgage and deed of trust loans are the principal types of financing for real estate purchases. Mortgage loans involve a borrower (the mortgagor) and a lender (the mortgagee). Deed of trust loans involve a third party (the trustee) in addition to a borrower (the trustor) and a lender (the beneficiary).

After a lending institution has received, investigated, and approved a loan application, it issues a commitment to make the mortgage loan. The borrower is required to execute a note agreeing to repay the debt and a mortgage or deed of trust placing a lien on the real estate to secure the note. The security instrument is recorded to give notice to the world of the lender's interest.

The mortgage document or deed of trust secures the debt and sets forth the obligations of the borrower and the rights of the lender. Full payment of the note by its terms entitles the borrower to a satisfaction, or release, which is recorded to clear the lien from the public records. Default by the borrower may result in acceleration of payments, a foreclosure sale, and, after the redemption period (if provided by state law), loss of title.