The note, the mortgage, and Florida's lien theory
A mortgage transaction uses two important documents. The promissory note is the borrower's written promise to repay the debt. The mortgage is the security instrument that pledges the real property as collateral for that debt. The borrower is the mortgagor; the lender is the mortgagee.
Florida is a lien-theory state. The borrower keeps legal title and possession while the lender holds a lien as security. Florida Statutes section 697.02 states that a mortgage is a specific lien on the described property and is not a conveyance of legal title or the right of possession.
If the borrower defaults, the lender must use the legal foreclosure process and does not automatically become the owner. This differs from title theory, where legal title is described as passing to the lender or trustee until the debt is satisfied.
- Promissory note: evidence of the debt and the promise to repay
- Mortgage: security instrument creating a lien on the real property
- Mortgagor: borrower and property owner
- Mortgagee: lender and holder of the mortgage
- Florida: lien theory; default leads to foreclosure, not automatic lender ownership
- Hypothecation: pledging property as security without surrendering possession
Mortgage clauses you must recognize
Mortgage clauses assign rights and duties between the borrower and lender. On the exam, focus on the effect of each clause rather than memorizing legal language.
An acceleration clause allows the lender to declare the entire unpaid balance immediately due after a specified default. A due-on-sale, or alienation, clause permits the lender to call the loan due when the property is transferred without the lender's consent. A defeasance clause requires the lender to release the lien after the debt is fully paid.
A prepayment clause addresses whether the borrower may repay early and whether a permitted penalty applies. A subordination clause allows one lien to move to a lower-priority position. An exculpatory clause can limit the lender's recovery to the property rather than the borrower's other assets, creating nonrecourse treatment to the extent stated.
- Acceleration: entire debt becomes due after default
- Alienation or due-on-sale: debt may be called due upon transfer
- Defeasance: lien is released when the debt is paid
- Prepayment: governs early payoff and any allowed penalty
- Subordination: changes lien priority
- Exculpatory: limits personal liability as stated
Conventional, FHA, and VA loans
A conventional loan is not insured or guaranteed by a federal government program. When a conventional buyer makes a smaller down payment, the lender may require private mortgage insurance, or PMI. PMI protects the lender, not the borrower, if the borrower defaults.
An FHA loan is made by an approved lender and insured by the Federal Housing Administration. The insurance reduces the lender's risk; FHA does not lend the purchase money directly to the typical borrower.
A VA loan is made by a private lender and partially guaranteed by the U.S. Department of Veterans Affairs for eligible borrowers. The guarantee protects the lender against a portion of loss. Neither FHA insurance nor a VA guarantee relieves the borrower of the duty to repay.
- Conventional: no federal insurance or guarantee
- FHA: lender makes loan; federal agency insures it
- VA: lender makes loan; federal agency guarantees part of it
- PMI: private insurance protecting a conventional lender
- Mortgage insurance or a guarantee does not protect the borrower from foreclosure
Buying property with an existing mortgage
A buyer who assumes an existing mortgage agrees to become personally liable for the debt. If the lender approves the assumption but does not release the original borrower, the original borrower may remain secondarily liable. A novation is needed to substitute the new debtor and release the original debtor when the lender agrees.
A buyer who takes title subject to an existing mortgage does not promise the lender to pay the debt and is generally not personally liable for it. However, the property still secures the loan. If payments stop, the lender may foreclose and the buyer can lose the property.
Do not confuse either method with purchasing free and clear, which means no relevant liens or encumbrances remain against the title. A due-on-sale clause may allow the lender to demand payoff after a transfer.
- Assumption: buyer accepts personal liability for the existing debt
- Subject to: buyer takes the property without personally assuming the debt
- Both methods leave the mortgage lien attached unless it is paid or released
- Novation: lender agrees to replace and release the original debtor
- Due-on-sale clause may affect a transfer
Qualifying the buyer: PITI, LTV, and equity
A lender evaluates income, recurring debts, credit, assets, the property's value, and the proposed loan terms. PITI stands for principal, interest, taxes, and insurance—the main components commonly considered in a housing payment. If applicable, mortgage insurance and association charges may also affect affordability.
Loan-to-value ratio, or LTV, compares the loan amount with the property's value. For exam problems, use the lower of the purchase price or appraised value when the facts instruct the lender to lend against value. The buyer's equity at purchase is generally the value minus the loan balance.
A discount point equals 1% of the loan amount. Points are prepaid finance charges used to affect the lender's yield; they are calculated from the loan amount, not the purchase price.
- PITI: principal, interest, taxes, insurance
- LTV = loan amount ÷ property value
- Equity = property value − liens
- One discount point = 1% of the loan amount
- APR helps compare the broader cost of credit; it is not simply the note rate
Worked mortgage math and exam traps
A home sells for $400,000 and appraises for $390,000. The lender will make an 80% LTV loan using the lower value. What are the loan amount and required cash down payment before closing costs?
Use the lower value, $390,000. The maximum loan is $390,000 × 0.80 = $312,000. The buyer then needs $400,000 − $312,000 = $88,000 toward the price before closing costs, which is more than 20% of the price because the appraisal came in low.
Do not reverse mortgagor and mortgagee, and do not call the mortgage the debt: the note evidences the debt and the mortgage secures it. PMI, FHA insurance, and a VA guarantee protect the lender and never erase the borrower's duty to repay.
- Lending value: lower of $400,000 price and $390,000 appraisal = $390,000
- Loan: $390,000 × 80% = $312,000
- Cash toward price: $400,000 − $312,000 = $88,000
- Borrower = mortgagor; lender = mortgagee
- Assumption creates personal liability; subject to generally does not
- One point is 1% of the loan, not 1% of the sale price
QUICK REVIEW
Say these aloud
- The promissory note is the promise to repay and the mortgage is the security lien; Florida follows lien theory, so the borrower keeps title and possession.
- Acceleration follows default, alienation follows transfer, and defeasance follows payoff; FHA insures, VA guarantees, and conventional loans have neither.
- Assuming a loan creates personal liability, taking subject to generally does not, and LTV math uses the lower of price or appraised value.
KNOWLEDGE CHECK
Five-question quiz
Choose your answers, then check your score.
Licensing-path action
Create a one-page mortgage vocabulary card in your notes with these pairs: mortgagor/borrower, mortgagee/lender, note/debt promise, mortgage/security lien, assumption/personal liability, and subject to/no personal assumption. Review it twice today, then score at least 4 out of 5 on this lesson's quiz. Continue or enroll in a FREC-approved 63-hour pre-license course; these daily lessons are supplemental only.