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Meaning of First Mortgage
A first mortgage is a lien on a property that secures the mortgage. It is a loan obtained for financing the purchase of a property, keeping the property as collateral for the loan taken. The security acts as an assurance to the lender in case of any default or non-repayment of the loan. In case of default by the borrower, the lender can institute foreclosure proceedings to sell the property in order to recover the amount along with the interest.
After understanding what is the first mortgage, let us understand the features of the first mortgage.
Features of First Mortgage
For obtaining a mortgage loan, the borrower has to sign a promissory note that acts as a promise to repay the borrowed amount as per the terms of the note. Apart from this, the borrower also signs a mortgage deed that gives the lender a lien on the property. In the event of default or non-repayment of the loan, the lender can sell the property to recover the payment as per the promissory note.
In case of the first mortgage, if the borrower defaults the lender has the primary right over the property. He has the right to recover full payment before any other lenders on the same property are paid. Only after the first mortgage lender is fully satisfied, other lenders using same property as collateral may use the property. This proves that the first mortgage carries a lower risk for the lenders as compared to other mortgages.
What is the Difference between First Mortgage and Second Mortgage
A second mortgage is taken out on a property that is already mortgaged once. It is like a subordinate mortgage made while an original mortgage (first mortgage) is still in effect. While a first mortgage is generally taken for purchasing property, the second mortgage is taken for refinancing purposes or to obtain more money for improvements in the property.
The first mortgage holder has the primary right over the property as compared to the second mortgage holder. Let us understand the concept of first mortgage and second mortgage with the help of an example.
Example of First Mortgage
Let us say, you purchase a property worth $300,000. You pay $80,000 and finance the remaining amount of $220,000 by way of the first mortgage. After a few years, you take another loan of $50,000 for repairs and improvements by way of the second mortgage. Now, you face financial crises and are unable to repay the loan. The lender is hence compelled to foreclose on the mortgage by selling the property. The property fetches only $250,000. In such a scenario, the first priority to claim against the property proceeds is of the first mortgage holder. Therefore, he will receive $220,000 and after he is fully satisfied, the remaining proceeds of $30,000 are paid to the second mortgage holder. The second mortgage holder will not receive the full claim, as the sale of the property did not bring enough proceeds to pay both the lenders in full.
Few Things to Note about First Mortgage and Second Mortgage
The first mortgage holder does not get the ownership of the property; he only gets the lien on the same. The borrower is free to do whatever he wishes to do with the property but generally cannot transfer it without obtaining prior consent from the lender.
The borrower does not usually need the first mortgage lenders consent for obtaining the secondary mortgage. However, the secondary mortgage lender will always want an assurance that the borrower has enough equity in the property so that, in case of non-repayment or default, their interest is protected.
In the recent times, the first mortgage has gained a lot of popularity owing to its benefits. The lenders feel secure for the money they lend to the borrowers.