When you sign all the documents that go along with giving a mortgage, you will sign what is called a promissory note (also referred to simply as a note). This is the document that sets out the terms of the loan, and as the name implies, is your promise to repay the money. The mortgage is the document that puts up your real estate to secure repayment. In other words, the promissory note describes how much you are borrowing and the terms of the loan, while the mortgage is what gives the bank the right to take your home if you do not live up to what you agree to do in the promissory note. It is common for the mortgage to restate all the terms of the note, making the documents sometimes look very similar. However, they have very distinct purposes.
The reason the note is so important is because it is a negotiable instrument. Negotiable instruments are what make the system work. A buyer of a negotiable instrument, as long as the procedure is done properly, becomes a holder in due course. The point behind a holder in due course is that once the loan has been sold, you may be stuck with it, even if you did not fully understand the terms or there were irregularities because of a dishonest original lender. Later, a worksheet is provided that will help you find the best loan for your situation.
Negotiable instruments are treated differently from other contractual promises. They must be in a certain form (they are sometimes called form or formal contracts.) When in the proper form, they create rights for those to whom they are transferred (those who buy them) that other contracts do not.
The transferee of a promissory note secured by a mortgage who takes it in good faith and for value (buys it) becomes a holder in due course (HDC). An HDC has special defenses that a transferee of other contracts does not have. For example, if the mortgage broker lied to you about the terms of the loan (fraud), you could sue the broker but not the HDC, the person who bought the loan, if the loan was sold. The HDC would be protected against this type of fraud so long as the HDC was not aware of it at the time of purchase (bought in good faith).
Because of this and other protections, secondary lenders can buy mortgages without investigating each one to make sure everything is above board. Such an investigation would create such a time and expense problem that the secondary market could not function.
If you believe you were taken advantage of by a lender, tell your story and show your documents to an attorney. All the rules covering a negotiable instrument and a holder in due course are well beyond the scope of this post. There are irregularities against which an HDC is not protected, and an attorney can tell you if you have a case.
Never sign a note or mortgage unless you understand all the terms.