When you take out a loan to buy a home, the lender will likely ask you to sign two documents: a promissory note and a mortgage (or deed of trust). If the lender later sells your loan to another party, it will transfer these documents to the new owner—along with the right to receive payments and the right to foreclose if payments aren’t made—using an endorsement and an assignment.
Endorsements and assignments are important because these documents prove who owns your loan and, likewise, who has the right to foreclose if you stop making payments. If the foreclosing party doesn't have the proper documentation, you might have a defense to the foreclosure.
Primary Documents in a Home Purchase
To understand the difference between an assignment and an endorsement, you must first understand the different types of documents associated when purchasing a home.
Promissory Note: Your Promise to Repay the Loan
In casual conversation, we frequently use the word “mortgage” as another word for a home loan. While a mortgage (or deed of trust) is an important document included as part of taking out a home loan, a promissory note actually defines the terms and details of the loan and creates the obligation for the homeowner to pay back the loan. A mortgage, on the other hand, is a type of security instrument, and is discussed in more detail below.
Security Instruments: Giving the Lender the Right to Foreclose
When a lender makes a loan to a home buyer, the lender will need to protect its financial interest if the home buyer fails to repay the loan in accordance with the terms of the promissory note. So, to get the right to repossess and sell the property through a process called foreclosure, the lender will generally use one of two types of security instruments—a mortgage or deed of trust—depending on the state where the property is located.
Mortgages. While many homeowners refer to their home loan as a “mortgage,” a mortgage is actually a legal document that gives the lender the right to initiate and carry out a foreclosure. Slightly more than half of U.S. states use mortgages to create liens.
Deeds of Trust. A deed of trust is another type of legal document that creates a lien against real property. The primary difference between a mortgage and a deed of trust is that a deed of trust gives a third party, called a “trustee,” legal ownership of the property, in trust, until the loan is paid off, along with the right to initiate and carry out a foreclosure. A deed of trust is used in place of a mortgage in slightly less than half of U.S. states.
Both mortgages and deeds of trust are filed in the county records where the property is located so that future buyers and other interested parties are able to see that the property is subject to a lien.
The Difference Between Assignments and Endorsements
Lenders are generally free to sell home loans they originate to other companies, called investors, at any time after “closing” (when the documents associated with finalizing the purchase of a home are signed). Banks and investors frequently buy and sell home loans in today’s lending world, as they seek to avoid the expense associated with holding loans over time, as well as reduce their risk of homeowners defaulting on loans. Multiple investors might own a single loan before it's paid off.
Endorsements. When an investor purchases a loan, the previous owner will sign or “endorse” the note, formally indicating that the note is being transferred to a new owner. This process is called “endorsement.” Just as with a check, one party can transfer ownership of a note by signing it over to another party. Also, like a check, notes can sometimes be endorsed in blank, meaning that whoever holds the note owns it, and then it's called a “bearer instrument”.
Assignments. An investor who buys a home loan from the original lender, or a subsequent investor, will also want the protection provided by the security instrument associated with the property. The previous owner will transfer the rights associated with a security instrument (a mortgage or deed of trust) to the investor who purchased the loan using an assignment. Because mortgages and deeds of trust are usually recorded in county records shortly after closing, any subsequent assignment of the security instrument should also be recorded. Future buyers or other interested parties are then able to know exactly who currently holds a lien against the property.
If you’re facing foreclosure and think the foreclosing party doesn’t have complete documentation, consider talking to a foreclosure attorney. An investor who’s failed to properly document the exchange of the loan and associated rights, including failing to get the proper endorsements and assignments, might not have the right (called "standing") to pursue a foreclosure. The requirements for standing vary from state to state. An attorney can help you look for this type of defense and more.