Mortgagee: Definition, What They Do, and Role in Homebuying

What Is a Mortgagee?

A mortgagee is a lender: specifically, an entity that lends money to a borrower for the purpose of purchasing real estate. In a mortgage transaction, the lender serves as the mortgagee and the borrower is known as the mortgagor.

How a Mortgagee Works

Most people take out a mortgage to finance the purchase of a residence or commercial building. In order to limit its risk in the investment, the lender in the transaction creates a priority legal interest in the value of the property, substantially lowering the probability it, the mortgagee, will not be repaid in full if the borrower defaults on the loan. This is done through a perfected lien and title ownership.

A mortgagee represents the interests of the lending financial institution in a mortgage deal. Lending institutions can offer a variety of products to borrowers, representing a significant portion of loan assets for both individual lenders and the credit market overall.

Mortgage Lending Products

Mortgagees can structure mortgage loans with either a fixed rate of interest or a variable rate of interest. Most mortgage loans follow an amortization schedule that provides for steady monthly cash flow to the lending institution in the form of installment payments until the loan is paid off at the end of its term. Standard fixed-rate installment mortgage loans are generally the most common type of mortgage loan issued by lenders. Adjustable rate mortgage loans can also be offered as a variable rate mortgage product.

Lenders can also issue non-amortizing loans. However, these products are not typically qualified mortgages and carry much higher risk. Non-amortizing loans may have either fixed or variable rates. They are loans that defer principal cash flows for the borrower to one lump sum payment. During the duration of the loan, interest payments may or may not be required. Popular types of non-amortizing mortgage loans are balloon payments loans and interest-only loans.

Protections for Mortgagees

In a mortgage loan, the mortgagee has rights to the real estate collateral associated with the loan. This provides the lender with protection against default. However, it also requires certain provisions to be made for the seizing of collateral assets if default occurs. For this reason, mortgagees include a perfected lien and integrate title rights into a mortgage lending contract.

A lender’s legal counsel drafts a perfected lien to allow a mortgagee to easily obtain the real estate associated with a mortgage loan if the mortgagor defaults. A perfected lien is a lien that has been filed and recorded with the appropriate agency, giving the mortgagee the right to obtain real estate collateral more easily. In a secured mortgage loan, the mortgagee is also the named real estate property owner on the property’s title. With the lien and property title, a mortgagee can easily obtain legal rights and institute specific procedures for vacating a property to be taken over in foreclosure.

The Bottom Line

A mortgagee is simply the lender or bank financing a mortgage. Mortgagee loans are set up using fixed or variable interest rates, and these loans usually follow an amortization schedule to provide steady payment to the lender. Protections are put into place, so the mortgagee won't lose out if the borrower defaults on the loan.