Must a Mortgage Be in Writing?

Getting a mortgage is a big step. Whether you are a consumer buying a first home or a small business owner considering buying commercial real estate, mortgages involve a lot of paperwork. As a result, understanding the legal requirements for mortgages is crucial.

A common question is, "Do mortgages have to be in writing?" The short answer is: “Yes." There are two reasons for this:

• The Statute of Frauds
• State law

Statute of Frauds

Most agreements are valid whether they begin as an oral contract or a written contract. But agreements that involve real estate transfers are so important that they aren't enforceable if they aren't in writing. This is one of the main requirements of the Statute of Frauds, a very old common law concept still followed today.

The Statute of Frauds began in England in 1677. Its aim is consumer protection. The Statute of Frauds aims to prevent a promisor, such as a lender, from fraudulently saying that someone gave them a mortgage. As a result, under the Statute of Frauds, real estate transactions involving the sale of land must be in writing. The Statute of Frauds is in use in some form in all of the states.

Other types of contracts also aren't enforceable if they aren't in writing under the Statute of Frauds. These include:

• An agreement to pay someone else's debts
• Contracts that will take more than one year to complete
• Contracts for the sale of goods over $500
• Contracts in consideration of marriage

Exception to the Statute of Frauds

There is an exception to the Statute of Frauds known as “part performance." Partial performance allows an unwritten mortgage to be enforceable under specific circumstances, such as a “purchase money mortgage." This occurs when the buyer gets purchase price money to buy real estate, which will have a mortgage. This is also known as owner or seller financing.

The application of part performance varies depending on state law. Some jurisdictions interpret the doctrine more narrowly than others.

State Law

Apart from the Statute of Frauds and part performance, state law controls several aspects of the mortgage process. In the initial stage, state laws govern the requirements for a valid contract, including real estate contracts such as mortgages. Essential terms that must be part of an enforceable contract under state law include signature and witnessing requirements.

State laws govern the process of recording a mortgage. Most states need a written agreement for recording. Under New York law, all deeds must be recorded in the county clerk's office where the property is.

State law can come into play even after the mortgage has been granted. Some states specifically mandate that oral modifications to liens on real property are not allowed. In 2023, a federal appellate court scolded a lender for not getting a written loan modification. The lender claimed there was an oral modification to a home equity loan. The lender wanted to extend the loan term. The court said Tennessee state law does not allow oral agreements such as liens on real property.

Validity of Electronic Contracts

The writing requirement has expanded to include electronic contracts. Electronic documents and signatures have become common in many areas of business. Digital agreements, complete with electronic signatures, meet the writing requirement under the Statute of Frauds. This expansion recognizes the role that technology plays in business law.

Advantages of Getting the Mortgage in Writing

Even where part performance applies, getting the mortgage in writing is highly advisable. Getting a written mortgage is always the safer route, as it will aid you in seeking remedies such as promissory estoppel if issues arise. Oral agreements are not the best way to handle personal property matters for many reasons:

• Having a written contract reduces the potential for misrepresentation and disagreement. The terms of the contract are clear when it's in writing. If there are allegations of breach of contract, oral contracts often result in "he said, she said" scenarios that could lead to lengthy and costly litigation.
• Oral testimony regarding the mortgage loan agreement is subject to clouded recollections and intentional fabrication. On the other hand, a written mortgage speaks for itself and should avoid a credibility contest in court.
• By definition, an unwritten mortgage is unrecordable.
• Other parties can record liens and mortgages on the real estate after the initial loan. This can result in the holder of the unwritten mortgage, the original creditor, losing their repayment priority under the earlier loan. If necessary, the mortgage must be recorded rather than placed in a file folder for future recordation.

So, from the borrower's perspective, a written mortgage provides a clear understanding of their obligations and the consequences of non-compliance. From the lender's perspective, it assures the security of their investment, allows for the enforcement of their rights, and helps maintain the priority of their claim.

While the principle that a mortgage should be in writing is generally consistent across the U.S., the specifics can depend greatly on state law. It is important to get your mortgage in writing to avoid complications in the future. As a business owner, ensuring your mortgage aligns with the Statute of Frauds and state laws will save you from potential legal issues.

Get a Real Estate Lawyer

Oral contracts are valid under certain circumstances, but they are not preferred. Many states provide standard "boilerplate" forms for mortgages to ensure that the terms of the agreement are clear. Due to jurisdictional variations and complexities around sales contracts, disclaimers, specific performance, and more, it's crucial to consult with a real estate lawyer. 

A real estate attorney can ensure that your mortgage agreement is enforceable and tailored to your situation. Therefore, it's always advisable to consult with a knowledgeable real estate lawyer familiar with the laws of your state when the subject matter is mortgages.