Note v. Mortgage

UpdatedNov 5, 2010

Key Takeaways:

A mortgage consists of two documents.
The note is the buyer's promise to make the payments.
The mortgage gives the lender a right to sell if the borrower defaults.

What is the distinction between a mortgage, note, and deed?

There is a difference between a note and a mortgage. Despite what most people think the note not the mortgage is what the bank looks to when collecting. You could still be on a mortgage, which would prevent a resale in the case of divorce if the parties wanted to have some connection during a resale/refi. I want to have my ex-spouse removed from the mortgage — my ex-spouse is not on the note, consequently the bank would not look to my ex-spouse for collection. Any suggestions about doing this as that is what we want done now prior to a resale/refi. I live in Massachusetts.

You are making a distinction that requires a discussion of the mechanics behind a mortgage.

Let us define our terms. A mortgage is a financing arrangement in which the person buying property (or one who already owns property) receives a loan, and the property is pledged as security to guarantee repayment of the loan.

A mortgage consists of two documents: a note (or bond); and the mortgage itself.

The note is the buyer’s personal promise to make the repayments. If there is a foreclosure against the property and the foreclosure sale does not yield enough to cover the outstanding mortgage debt, the note serves as the basis for a deficiency judgment against the borrower for the balance still due.

The mortgage itself is a document that gives the lender the right to have the property sold to repay the loan if the borrower defaults. Since the mortgage in effect gives the mortgagee (the lender) an interest in the land, the mortgage is recorded at the county clerk's office.

Usually, when mortgaged property is sold the mortgage is paid off at the closing. But property can be sold without paying off the mortgage, either by having the purchaser take subject to the mortgage, or having the purchaser assume the mortgage.

Judicial Foreclosure

If the mortgagor (the borrower) defaults (fails to make the monthly mortgage payments), the mortgagee may reach the land to satisfy the debt. In some states this is accomplished with a a judicial foreclosure. This is a lawsuit in which the mortgagor is evicted and the property is sold under the supervision of a government official, such as a sheriff. A judicial foreclosure can start 120 to 180 days following a default.

Deed of Trust

Some states allow the lender to use a deed of trust. I like American Banker’s definition: "A three-party document conveying interest in property, almost always real estate, to a trustee. In many states, deeds of trust are used instead of mortgages. In those states, the trustee holds the deed in favor of the lender and then reconveys the title to the borrower when the loan is paid in full. Sometimes called a trust deed."

California and Massachusetts are two states where home loans are handled with deeds of trust instead of mortgages. However, the term "mortgage" is so ingrained in our vocabulary that almost everyone says "mortgage" when the legal instrument may be a deed of trust.

Private Foreclosure

A deed of trust allows the trustee to sell the property in a private sale if the borrower defaults. The private sale must occur in a commercially reasonable manner so as to bring the highest price possible. A private sale may occur as soon as 60 days following a default.

Deed

You did not mention the deed to your property, but I will describe deeds here because they may be relevant to your situation.

A deed is the document that passes the title from the grantor to the grantee. There are two basic types of deeds. A quitclaim deed passes whatever title or rights the grantor has in the property to the grantee. A warrantee deed contains promises made by the grantor about the title or rights conveyed.

A deed must contain specific formalities, including the legal description of the property, and must be executed (signed in front of a notary public in most states), and delivered to the grantee. This two-paragraph description of a deed barely summarizes deeds and their importance in property law. Consult with an attorney in your state to learn more.

Observation

You mentioned your ex-spouse is not on the note for your mortgage. I would be very curious to learn how you found financing where your ex-spouse had no personal liability for the amount borrowed (name not on note) but had legal rights associated with the mortgage (the interest in the property). In all property financing I have seen, the mortgage and note have been inexorably intertwined. Perhaps I lack imagination, and I have been accused of that before, but I cannot fathom a reasonable series of events to lead you to the situation described.

I think it is likely your ex-spouse signed a quitclaim deed when you divorced. This would remove the ex-spouse’s name from the title to the property but not the mortgage or note.

The best way to remove an ex-spouse from a mortgage is to refinance the mortgage. Bills.com makes it easy to compare mortgage offers and different loan types. Visit the Bills.com Mortgage Refinance Quote page to receive no-cost quotes from pre-screened lenders.

I hope the information I provided helps you Find. Learn. Save.

Best,

Bill

Bills.com

5 Comments

LLisa, May, 2014

Lenders will sometimes require both spouses to sign a mortgage but only one to sign a note when one spouse has good enough credit to qualify for the loan but the other one doesn't. A lender may have a policy of requiring all of the signers of the note (the borrowers) to have a minimum credit score. When one spouse doesn't have the required credit the but the other one does, only the spouse with good credit will sign the note. However, if both spouses have title to the property, the lender may want both of them to sign the mortgage. The co-mortgagor who does not sign the note is not personally liable for the loan, but that co-mortgagor grants to the mortgagee the right to foreclose if the signer of the note defaults. The lender will want this person's signature on the mortgage so that the mortgagee claims on the property take precedence over both spouses claims as owners of the property if the loan defaults. By getting the poor-credit spouse to sign the mortgage but not the note, it makes it easier for the lender to sell the note on the secondary market. This happened with my husband and me. I qualified for the best interest rate on a home equity loan but his credit score was just a little too low, so the lender didn't want his name on the note while requiring both of our names on the mortgage.

KKevin, Jan, 2014

I have a similar situation. The spouse was on the mortgage and deed, but not loan. I lost my job, got divorced and as part of the settlement her name was removed from the deed. Due to job loss there was a long process of foreclosure, and since the spouse is on the "mortgage" she is still in the foreclosure procedings. I feel this is wrong, as when you read explicitly the mortgage it refers to the holder of the loan, and the names on the deed, neither of which she is on. To have had her removed according to the bank I would have needed to refinace, but was impossible based on no income.Just wondering your thoughts on the situation?

BBill, Jan, 2014

I am confused by the facts you shared. A note is your personal promise to repay the loan. A mortgage (in the classic, law-school textbook definition) is a document, filed with the county recorder, that gives the lender the right to foreclose if the borrower defaults on the note. A deed is a document that conveys a person's rights to real property.

I think what you are really describing is you and your spouse are on the note. But your spouse is not listed on the property's title. Perhaps your spouse filed a quitclaim deed to give you whatever interest she had in the property.

If your spouse is a note (loan) co-signer, then one way she can remove her liability is to file bankruptcy. As you mentioned, another way is to refinance in your name alone.

You mentioned a foreclosure. If you haven't already, consult with a lawyer in your state who has mortgage negotiation or litigation experience.

KKarin, Mar, 2014

I just purchased a home, all the down payment coming from me as sole provider and I am the only party financially liable on the note but my spouse is on the deed with me and much to my surprise the bank (Wells Fargo) also put her on the mortgage (but not the note). So although it doesn't make sense and all the comments scare me should I someday be facing divorce, it's is indeed not only possible but a regular occurrence for a spouse's name to be on a deed and mortgage without the note and unfortunately removing the spouse from the deed/title does not solve the mortgage issue. Seems counterintuitive.

JJim, Oct, 2012

I found your explanation to be very accurate and right on the mark. I have personally seen a lot of spouses do shady things to their mortgages prior to a divorce. Often times its to cash out equity or to stick a spouse with debt. Another good explanation for a note and mortgage is found at [marketing link removed] and have solutions for people that may own a note.