Mortgage Theory

A mortgage theory for a bad credit mortgage is a pledge of property to secure the repayment of a debt. If the debt is not repaid as agreed between the lender and borrower, the lender can force the sale of the pledged property and apply the proceeds to repayment of the debt.


A person can pledge his real estate as finance collateral for a loan by using any of the four methods: the regular mortgage, the equitable mortgage, the deed as security, and the deed of trust.

Regular Mortgage Theory
The standard mortgage or regular mortgage is the mortgage handed down from England and the one commonly found and used in the United States today. In it, the borrower conveys his title to the lender as security for his debt. The mortgage also contains a statement that it will become void if the debt it secures is paid in full and on time. In the title theory states, the conveyance feature if the mortgage stands. In lien theory states, such a mortgage is considered to be only a lien against the borrower’s property despite its wording.

Two documents are involved in a standard mortgage loan, a promissory note and the mortgage itself; both are contracts. The promissory note establishes who the borrower and lender are, the amount of the debt, the terms of repayment, and the interest rate.

Equitable Mortgage
An equitable mortgage is a written agreement that, although it does not follow the form of a regular mortgage, is considered by the courts to be one. For example, Jones sells his land to Smith, with Smith paying part of the price now in cash and promising to pay the balance later. Normally, Jones would ask Smith to execute a regular mortgage as security for the balance due. However, instead of doing this, Jones makes a note of the balance due him on the deed before handing it to Smith. The law of most states would regard this notation as an equitable mortgage. For all intents and purposes, it is a mortgage, although not specifically called one. An equitable mortgage can also arise  from the money deposit accompanying an offer to purchase property. If the seller refuses the offer and refuses to return the deposit, the courts will hold that the purchaser has an equitable mortgage in the amount of the deposit against the seller’s property.

Deed of Trust
In some states debts are often secured by trust deed. Whereas a mortgage is a two-party arrangement with a borrower and a lender, the trust deed, also known as a deed of trust, is a three-party arrangement consisting of the borrower, the lender, and a neutral third party (a trustee). The key aspect of this system is that a borrower executes a deed to the trustee rather than to the lender. If the borrower pays the debt in full and on time, the trustee reconveys title back to the borrower. If the borrower defaults on the loan, the lender asks the trustee to sell the property to pay off the debt. 

Chattel Mortgage
A mortgage can also be used to pledge personal property as security for the debt, which is referred to as a chattel mortgage. The word chattel is a legal term for personal property which originated from the Old English word for cattle. As with real property mortgages, a chattel mortgage permits the borrower to use his mortgaged personal property as long as the loan payments are made. If the borrower defaults, the lender is permitted to take possession and sell the mortgaged goods. In a growing number of states the use of chattel mortgages are being replaced by security agreements under the Uniform Commercial Code.

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Mortgage Theory To Lending Practices