Your house is not just a "dwelling" or "structure" as your legal documents describe it; it's your home. But when you remove sentiment from the picture, your home's mortgage represents an important legal transaction. A legal mortgage is the document that accurately outlines your financial obligation to the mortgagee and legally complies with the requirements of the property's jurisdiction. If any part of a mortgage document is incorrect or missing, which renders it an invalid legal document, it becomes an equitable mortgage.
Legally, most courts look at "intent" to determine that an equitable mortgage does, in fact, have legal merits.
Defining a Legal Mortgages
A legal mortgage is the mortgage company’s lien on your property that they hold in exchange for your monthly payments. Legal mortgages have all of their blanks filled in with correct information and are signed in the right places. They're also recorded according to the laws and regulations of the county in which the property is located. Legal mortgages are binding documents that, without a doubt, lock you into making your loan payments or facing foreclosure.
When you’ve paid your property off, the lender may send it and other applicable documents to you with a letter stating that the loan has been paid in full. But lenders’ policies and procedures vary. Some lenders just record a release with your local property land recorder, which is usually the county. Others leave it up to you to record the release based on documentation they provide. However your lender does it, make sure you get copies of everything.
Understanding Equitable Mortgages
There are times when something goes wrong with a mortgage. For instance, the lender might have forgotten to fill in the legal description blank on the mortgage. Alternately, you and your spouse might have signed on the wrong lines. Technically speaking, the mortgage you signed (or forgot to sign) isn't a valid document.
However, most courts will look at your intent and decide that it's an equitable mortgage, since calling it a mortgage would be the fair (equitable) decision based on what your intent appeared to be. The lender has all of the rights it would have if it were holding a legal mortgage, including the right to foreclose on the property if payments aren’t made.
Evaluating Other Equitable Mortgages
Equitable mortgages can be created in some other, more arcane legal situations. For instance, if the lender makes you give it an actual deed that it holds in escrow so that it can take your property without foreclosure, a court would probably roll it back to an equitable mortgage. Vendor and vendee liens, which are sometimes used in contract for deed transactions, can also turn into equitable mortgages.
Equitable Mortgage Priority
Equitable mortgages are mortgages that have to be honored, just like legal mortgages. However, there is one key difference: A legal document can jump ahead of an equitable one in priority. If you sign an incorrectly drafted mortgage in 2017, then put a second legal mortgage on your property in 2018, that second mortgage would actually become your first mortgage. However, your ability to do this will depend based on the laws in your community.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.