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Mortgages: An Encumbrance and a Tool

| Nov 11, 2020 | Real Estate And Property Law

The law of mortgages is misunderstood. Many, many people understand a mortgage to only mean that a considerable sum of money they pay to a bank or mortgage servicing company monthly. In return, this individual gets to remain in their home. And of course, that is one example of a mortgage. But to truly understand what is going on, one has to understand that a mortgage is just a name given to an interest in real estate a borrower gives to a creditor. In other words, the borrower receives a securitized loan and his or her home is placed as collateral for the lender. If the borrower defaults, the lender has a right to foreclose. Everyone knows the circumstance I outlined above. If you own your home, it is likely that you received a loan from a bank to facilitate that purchase and that that bank has a mortgage on your home. Subject to some limitations, however, a mortgage can be a powerful tool for any business. [1]

Consider, for instance, a construction company that is doing work for a home owner intending to sell their property. The cost of the work is sizeable, approximately $50,000. The homeowner indicates that the construction company will receive payment from the proceeds of the home. This understanding is memorialized in a construction agreement. The construction company would be foolish to accept the terms of this agreement without securing the $50,000 it is promised. Otherwise, enforcing its right to payment may involve costly litigation and any judgment may be subject to discharge in bankruptcy. What the construction company should do is have a mortgage that secures its interest against the home drafted and recorded with the local Recorder of Deeds. That way, if the owner decided to change their mind on paying their obligation, they would be unable to deliver a clear title to any seller. The loan will appear on any title searches, and most buyers will not stick around long enough to see if the title can be cleared.

This is one example of how a mortgage can be a tool for any sized business. The attorneys at Rick Stock Law have years of experience in this and related matters. Please call today at 484-272-5133 or send us an email through our online contact form

  [1] The primary limitation relates to the “priority” of a mortgage. A “purchase money mortgage” meaning a mortgage associated with monies used to purchase a home, is first in priority.