Business Law 101 / MORTGAGES

By Albert L. Kelley

After the deed, the next most important real estate document is a mortgage. Now to be fair, mortgages do not need to involve real estate; personal property may be mortgaged as well. A mortgage on personal property is referred to as a chattel mortgage and has the same effect as a mortgage on real property. If the note isn’t paid, the personal property can be seized to satisfy the note.

A real estate mortgage is the method by which banks, finance companies, and private lenders protect themselves financially. It is not a conveyance of legal title or possession, although it can lead to a change in title and possession. A mortgage is a document given by the buyer, called the mortgagor to the financier, called the mortgagee. A mortgage MUST be in writing. A verbal mortgage is unenforceable. No particular language must be included in the mortgage. Under Florida law, any document providing for the sale of property with the purpose or intent of securing the payment of money, shall be deemed a mortgage.    A mortgage does not have to be recorded to be valid. However, if the mortgage is not recorded, it is unenforceable as to a bona fide purchaser without notice. In other words, if I give a mortgage to Bob Smith and he doesn’t record it, and then I give a second mortgage to the bank who does record it, the bank’s mortgage takes priority.

Often the mortgage will call for smaller monthly payments with a large lump sum payment made at the end of the mortgage period. This is referred to as a balloon mortgage. A mortgage is deemed a balloon mortgage when the final payment is more than twice the amount of the regular monthly or periodic payment. In Florida, a balloon mortgage MUST contain the following legend at the top of the face page as well as above the signature line on the signature page:

“THIS IS A BALLOON MORTGAGE AND THE FINAL PRINCIPAL PAYMENT OR THE PRINCIPAL BALANCE DUE UPON MATURITY IS $_____, TOGETHER WITH ACCRUED INTEREST, IF ANY, AND ALL ADVANCEMENTS MADE BY THE MORTGAGEE UNDER THE TERMS OF THIS MORTGAGE.”

A failure to include this legend will act to automatically extend the maturity date of the mortgage until the normal payments would pay off the mortgage if timely made.

It is important that mortgages be prepared properly. If there is an error in a mortgage which impairs another person’s title to property, the Court can award all costs, attorney fees and damages to the prevailing party. This could be extremely costly if the error results in the failure of a person’s right to sell their property.

Because a mortgage secures property, the mortgagor has certain obligations. The mortgagor must pay all taxes and assessments on the property. He does not have to insure the property, unless the mortgage requires it. The mortgagor may not take action that impairs the property or reduces its value.

If a mortgagor wants to transfer his interest in property without paying off the mortgage, he may do so by one of two methods. First, he may assign the mortgage, if the mortgagee allows. In this situation, the mortgagor will no longer be responsible for the mortgage. The mortgagor can also sell the property subject to the mortgage. In a “subject to” transfer, the mortgagor is still liable under the mortgage and the property continues to be secured.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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