Mortgages, Security Instruments, and Promissory Notes in Alabama

The short definition of a mortgage is that it’s a loan used to purchase real property. In Alabama, the mortgage is comprised of two parts: the security instrument and the promissory note. A security instrument is a specific type of document that provides security for the lender and contains terms (agreements) that apply until the buyer (borrower)repays the lender according to terms defined in an attached promissory note.

While the lender holds legal title to the property during this time, the borrower holds equitable title, which means they may occupy the property as if they hold legal title, but until the loan has been repaid, the lender actually owns it. This is because mortgages involve a lien against the property, held as security, that ends when the debt is repaid and the owner assumes legal title (after recording a release of mortgage).

The buyer must also complete a promissory note at the same time they fill out the security instrument. A promissory note is a negotiable instrument that contains an unconditional written promise, signed by the borrower, to repay the lender or its designated agent. It defines the amount and specific terms of the loan between the borrower and the lender.

Promissory notes can be secured or unsecured. Unsecured notes set forth the terms and conditions associated with repayment, but there is no mention of collateral to protect the lender’s interest. These are more common with personal property. Mortgages, which are real property transactions, use secured promissory notes. The borrower offers the property as security (collateral) to guarantee the loan, and agrees that a failure to repay the loan could cause the lender to foreclose on the property.

Buyers seek mortgages when they wish to purchase property on credit. The Code of Alabama sets forth the rules for mortgages in that state at Title 35 Section 10. Alabama does not provide a statutory form for security instruments, nor do they recognize short form mortgages. Long form mortgages are typically used by institutional lenders for single-family homes.

When deciding to purchase a home, take the time to consider financing options. Conventional mortgage loans are not guaranteed by the federal government [1]. Conforming conventional mortgage loans “have maximum loan amounts that are set by the government,” while non-conforming loans are not as standardized and dependent upon the lender [2]. FHA loans are administered by the Federal Housing Administration, and the “standards for qualifying for these loans are generally more flexible than for conventional loans” [3]. VA loans are offered by the Department of Veterans Affairs. The VA“does not make loans, but rather sets the rules for who may qualify, arranges the terms under which mortgages may be offered, and guarantees any loan made under the program” [4].

Many prospective homeowners seek out and compare mortgage lenders prior to making an offer on a piece of property. When working with a lending institution, buyers can receive preapproval, which gives them an idea of what type of mortgage they can obtain, as well as the amount of the potential loan. Preapprovals are not only informative, but also helpful when working with a real estate agent. Many real estate agents require buyers to arrange for a preapproval prior to working with them.

Once the buyer makes an offer that is accepted by the seller, the mortgage can be finalized. Through a process called underwriting, the lending institution evaluates the buyer and determines the buyer’s ability to repay the loan [5]. This determines the amount of the loan and the interest rate. Each buyer must sign the mortgage, as well as any co-borrowers or co-signers. A co-borrower is someone whose name appears “on loan documents and whose income and credit history are used to qualify for the loan” [5]. The borrower and any co-borrowers are responsible for upholding the terms of the note and have an obligation to repay the loan [5]. A co-signer is someone who “signs a loan or credit application with another person and promises to pay if the primary borrower doesn’t pay” [5]. In other words, a co-signer is only responsible for repaying the loan if the borrower and any co-borrowers go into default.

When filing a mortgage, include any other documents required for recording. The buyer must complete a promissory note, but it is rarely recorded with the mortgage. Many lenders retain the note for the duration of the mortgage and return it to the borrower after the debt is repaid. Contact the lender with questions.

A typical mortgage includes the names of all borrowers (and their spouses, if applicable), information about the lending institution, the date the borrower signed the promissory note, the property county and address, and a legal description of the property. The borrower must indicate if the security instrument includes any riders. Riders are attachments that amend or supplement a document.

A homestead is defined in Alabama as a single-family owner-occupied dwelling [6], and Alabama requires spousal signatures for homestead mortgages (Ala. Code Sec. 6-10-3).The mortgage must be acknowledged by an authorized individual. Security instruments must meet standards of form and content for recording documents relating to real property. Submit the signed, completed security instrument at the local probate office.

This article is provided for informational purposes only and is not a substitute for the advice of an attorney. Contact a lawyer with any questions about mortgages or other matters related to security instruments and transfers of real property in Alabama.