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Understanding the basics of a mortgage

As a creditor, you must feel secure about the validity of the mortgage agreement
By Entrepreneur Staff |

A mortgage is a contract where a borrower secures a creditor through pledged property in case he fails to pay for money owed.

It gives the creditor the right to foreclose on his property through an agreement or the courts. In a foreclosure, the property or item mortgaged is sold in a public auction, and the proceeds used to pay for the unpaid portion of the loan.

Considering that the mortgage may well be the source of credit repayment, it is crucial that you, the creditor, feel secure about the validity of the mortgage agreement. The agreement is valid if it satisfies the following requirements:

• The agreement secures the fulfillment of a principal obligation. Remember that a mortgage is an accessory obligation that cannot exist by itself

• The mortgagor need not be the debtor (as in the case of third-party mortgages), but he must always be the absolute owner of the property mortgaged

• The mortgagor must have free disposal of the property mortgaged, and if not, the legal authority to constitute the mortgage

• To bind third parties, the mortgage must be registered in the register of deeds in the place where the property is located

• For chattel mortgages, the mortgage agreement must have an affidavit of good faith attached to it for it to be valid

Another thing to watch out for is the provision in the agreement allowing extra-judicial foreclosure. The rule is, unless allowed in the mortgage agreement, you may foreclose only through the courts by filing a petition and proving the validity of the principal obligation; you must also prove that foreclosure is necessary to pay for the money owed. This process used to take time, but a revised aw allowed foreclosure through a notary public in an extra-judicial proceeding.

Before signing a mortgage agreement, it is wise to demand a provision allowing extra-judicial foreclosure to ensure immediate foreclosure and swift payment of the money owed.

This article was originally published in the April 2004 issue of Entrepreneur Philippines.

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