An equitable mortgage is a type of mortgage loan agreement in which the lender has possession of all the documents related to the property that is being purchased with the proceeds from the loan. As the holder of the title documents, the lender has the ability to lay claim to the property in the event that a default on the mortgage loan should take place. This includes the ability to declare the loan to be in default, seek the foreclosure of the property in a court of law, and ultimately sell the property in order to settle the outstanding debt.
The process of an equitable mortgage usually involves a homeowner seeking some type of financing from a lender. In order to secure the financing, the homeowner will pledge the property as security or collateral on the loan. The owner will also tender all the title documents to the lender, who will retain possession of them for the duration of the loan. Once the outstanding balance is settled in full, the documents are returned to the owner and the lender relinquishes all claims on the property.
In the event that the debtor should fail to make payments on the equitable mortgage, the lender has the right to declare the loan to be in default and seek redress through the court system. Upon the court awarding ownership of the property to the lender, the property can be sold to settle any debt remaining. At the discretion of the lender, the property may be retailed and used as rental property. Depending on real estate laws that apply in the jurisdiction in which the property is located, all the proceeds of the sale may go to the lender, even if the property is sold for an amount above and beyond the outstanding loan balance. In other jurisdictions, the court decision may call for the debtor to receive anything that is left after the debt is settled and all court costs are paid from the proceeds of the sale.
The concept of an equitable mortgage is somewhat different than other means of pledging collateral for a mortgage loan, in that the lender holds the title documents in check for the duration of the loan itself. The owner of record is still responsible for payment of any property taxes as well as managing the upkeep of the property during the loan period, and cannot attempt to sell the property without the permission of the lender. Once the equitable mortgage is paid in full, the title documents are returned to the owner, who is then free to retain or dispose of the property as he or she sees fit.