When a lender advances money to the purchaser of residential or commercial real estate, two documents are executed with respect to the repayment of those funds:
A promissory note sets forth the terms of repayment—how much interest will be paid, how many years the borrower will take to pay off the loan, and the principal amount being financed. Typically, the payments are “amortized” over a number of years, with the borrower paying the same monthly payment, but with a greater portion of the earlier payments being applied to interest.
A mortgage or deed of trust—A mortgage or deed of trust establishes a lien on the real property purchased. The lender holds the lien and has the right to enforce the lien, should the borrower default on the note. In most instances, when the borrower defaults on the note, the lender will have the right to accelerate the loan. If the borrower cannot bring the loan current, and the parties cannot restructure the loan, the mortgage customarily gives the lender the right to foreclose. Foreclosure is a formal legal process that typically ends in a foreclosure sale, where the property is sold at auction and the lender has priority to the proceeds of sale.
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