Know Thy Documents: Deeds, Notes, and Mortgages, oh my…
Real Estate professionals are expected to have a lot of information under their belts (and in their heads) to help their clients. There is there so much new information coming out all the time and keeping it all straight can be exhausting and confusing. Sometimes the things we know best get shoved into that corner of our brains where I’m sure all the unmatched socks go. Which is why it is helpful to have a quick refresher on the things we talk to our clients about every day, because they often ask (and we don’t want to admit we’ve forgotten….)!
There are three basic instruments in almost all real estate transactions, and knowing which is which and how they relate to each other will be very valuable knowledge to provide to your clients. The three documents are: The Deed, The Note, and The Mortgage.
Property deeds come in many forms, most of them you will recognize as the Quit Claim Deed, General Warranty Deed, Special Warranty Deed, and Certificate of Title. Quit Claim Deeds (often called a “QCD”) and Warranty Deeds are the most common types of deeding instruments to convey property from one party (the “Grantor”) to another (“the Grantee”). Special Warranty Deeds will come up frequently when a client is purchasing REO property and the deed is being conveyed by the bank who took the property during foreclosure, or the subsequent deed-holder, which could be a loan servicer or a government-backed entity like Fannie Mae/Freddie Mac/Ginnie Mae. Certificates of Title are only given by the Clerk at foreclosure sale, after a final judgment has been entered and a certificate of sale has been recorded.
It is important to remember a few things about deeds:
- The type of deed being given will dictate the type of ownership is being conveyed. General and Special Warranty Deeds convey greater promises to title than do Quit Claim Deeds; and Quit Claim Deeds provide greater promises to title than does a Certificate of Title.
- Deeds are recordable instruments. When you are researching property for a potential client, you should always be able to find the “granting deed” which is what conveyed title of the property from the previous owner as “Grantor” to the current owner and seller, the “Grantee.”
- When Deeds are prepared, they need to be signed by the Grantor, the person giving away title. Although they do not need to be signed by the Grantee, the person receiving title must acknowledge the transfer.
- Deeds do not need to be dated but they do need to be witnessed by two (2) people and also notarized.
The Note and Mortgage are like peanut butter and jelly. They need each other. Even though they do different things, they always stick together. When your buyer is approved for financing to purchase property, the two financing documents that are the most important to your client as well as to the bank are the Note and Mortgage.
The Note is usually a long-form document, printed on legal-size paper and is typically 2-3 pages long, never usually more than 5. The Note is the document that secures the debt owed against the individual who has taken the loan. It is essentially and otherwise called, the promissory Note – the promise to pay. The debtor, the person who now owes the debt, promises to pay the lender the amount owed on the Note, with interest, and specifies the amount of time the debtor has to pay the loan back.
It is important to remember a few things about notes:
- The Note is not a recorded instrument; therefore you will not be able to find it on the clerk or property appraiser’s website.
- The Note only obligates the people who are listed on the Note; it does not obligate property owners listed on the deed who are not listed on the Note.
- Buyers and Sellers who are concerned about deficiency judgments (the difference between the amount the bank accepts as judgment or short sale amount subtracted from total amount of debt owed on Note) should check to make sure that they are listed on the Note. If they are not, they are not responsible for the debt and therefore, a bank foreclosure will not affect their credit.
The Mortgage is the other half of the story to the Note. The Mortgage is the security instrument which evidences the lien placed on the property to secure the debt. In other words, the Mortgage is attached to the property while the Note is attached to the person.
Mortgages, as it should make sense, are recorded instruments, because they create a lien against the property. Mortgages are usually 6-10 pages in length but are often longer because they typically are accompanied by different riders and addenda which make specific demands against the type of lien on the land.
Buyers who are on the Mortgage or the Deed, are not necessarily also on the Note. People on the Mortgage are usually people who have a “property interest,” and are usually the same names that are listed on the Deed. Oftentimes however, in foreclosure cases, the person listed on the Mortgage is named in the complaint because they have an interest in the property and need to be put on notice of the pending court action. It does not necessarily mean that they will have a judgment entered against them that will affect their credit.
- The Deed is a recorded document memorializing the transfer of property from the Grantor to the Grantee.
- The Note is an unrecorded paper that binds an individual who has assumed debt through a promise-to-pay instrument.
- The Mortgage is a recorded document that secures the debt taken with a lien on real property as collateral for repayment on the Note.
The above information should be more than enough to help answer most of the common questions your clients will have about the relationship between three of the most important documents in a real estate transaction. If you- or your clients- have more specific or in-depth questions, make sure to always contact us. www.harrisonberrypa.com (407) 205-2901.