A mortgage is a voluntary lien on real estate. The person who borrows money to buy a piece of property voluntarily gives the lender the right to take that property if the borrower fails to repay the loan. The borrower, or mortgagor, pledges the land to the lender, or mortgagee, as security for the debt. Exactly what rights the mortgagor gives the mortgagee vary from state to state.

Title-theory States,
Here the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title. Legal title is returned to the mortgagor when the debt is paid in full (or some other obligation is performed). In theory, the lender actually owns the property until the debt is paid. The lender allows the borrower all the usual rights of ownership, such as possession and use. Because the lender holds legal title, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults.

Lien-theory States
In this case, the mortgagor/borrower holds legal title. The mortgagee/lender simply has a lien on the property as security for the mortgage debt, or equitable title. The mortgage is nothing more than collateral for the loan. If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding to obtain legal title. The property is offered for sale, and sale proceeds are used to pay all or part of the remaining debt. In some states, a defaulting mortgagor may redeem the property during a certain period after the sale. A borrower who fails to redeem the property during that time loses the property irrevocably.

Illinois – Intermediate Mortgage Theory State
Illinois does not adhere strictly to either the title or lien theory. Illinois recognizes both a Mortgage approach (Buyer gets title to the property) and Deed of Trust (Lender has title to the property). As a result, Illinois often is referred to as an intermediate mortgage theory state. Where a Mortgage is used, the mortgagor/borrower remains the owner of the mortgaged property subject to the lien created by the mortgage. Although most of the real estate transactions in Illinois involve a Mortgage approach, because a Deed of Trust CAN be used in Illinois, Illinois is considered to be an Intermediate Theory State. IN FACT, MOST OF THE LENDING TRANSACTIONS IN ILLINOIS UTILIZE A MORTGAGE INSTRUMENT, NOT A DEED IN TRUST.

Where a Mortgage is used (Buyer has Title to the property), the lender is subject to the defeasance clause, which stipulates that the lien on the property is released by the Lender (Mortgagee) at the time the debt is repaid in full.

Mortgage Loans
A mortgage loan, like all loans, creates a relationship between a debtor and a creditor. In the relationship, the creditor loans the debtor money for some purpose, and the debtor agrees to pay or pledges to pay the principal and interest according to an agreed schedule. The debtor agrees to offer some property or collateral to the creditor if the loan is not repaid.

Mortgage loans are secured loans. Mortgage loans have two parts:

  • the debt itself
  • the security for the debt.

When a property is mortgaged, the owner must execute (sign) two separate instruments:

  • a promissory note stating the amount owed
  • a security document (mortgage), pledging the property as collateral for the amount owed.

Hypothecation In mortgage lending practice, a borrower is required to pledge specific real property as security (collateral) for the loan. The debtor retains the right of possession and control, while the creditor receives an underlying equitable right in the pledged property. This type of pledging is termed hypothecation. The right to foreclose on the pledged property in the event a borrower defaults is con­tained in a security agreement, such as a mortgage or a deed of trust.