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Security Instruments: Everything You Need To Know

Updated March 7, 2024 | Written by Josh Sainsbury Reviewed by Brooke Davis

When someone buys property, like a car or a house, they usually sign a loan agreement or promissory note. This agreement states that they will pay a certain amount of money within a specific time frame.

To ensure they get paid, the lender might ask for a security instrument, which can be a mortgage, deed of trust, or installment land contract. These instruments are legally binding, so both the lender and borrower need to understand what they are, how they work, and the legal implications.

What Is a Security Instrument?

A security instrument is a legally binding agreement between the lender and borrower or buyer and seller of a property. It provides a vehicle for the lender to enforce terms if the borrower fails to adhere to the loan agreement or promissory note terms. The security instrument also provides a way for the lender to recover some or all of the property value should the borrower default or the promissory note become invalid .

Unlike a loan agreement or promissory note, a security instrument is not concerned with the repayment terms. Instead, it focuses on  enforcing the promissory note by transferring property ownership to the lender in the event of default.

If you take out a home loan, you will likely sign a promissory note to pay monthly installments on your mortgage for 15-30 years. The bank handling your loan may also have you sign a security instrument in the form of a mortgage agreement, which allows the bank to take ownership of the property should you fail to repay your loan per the agreement terms.

Once the borrower satisfies the loan term, they receive a  promissory note release and take full ownership of the property without further obligation to the lender.

Types of Security Instruments

Different types of security instruments apply depending on the circumstances of your purchase agreement.

How Security Instruments Are Used in Real Estate

Although a promissory note establishes the payment terms for a real estate transaction, it does not necessarily establish consequences for non-payment. That is where the security instrument comes in.

The Role of Security Instruments

When you purchase a home or other real property, the lender may secure the promissory note through a security instrument. The instrument provides the lender collateral to recover the value of the loan if you default. In the case of a real estate transaction, the collateral is usually the property itself.

Common Security Instruments

In real estate, there are two common types of security instruments: mortgages and deeds of trust.

• Mortgages: Lender holds the mortgage while the loan is outstanding, allowing them to take possession and sell the property if necessary.
• Deeds of Trust: Similar to mortgages, but title is transferred to a neutral third party (trustee) who holds it for the lender’s benefit.

Importance of Security Instruments

• Enables lenders to recoup their investment by selling the property if the borrower defaults.
• Protects lenders from significant losses in case the borrower lacks assets to cover the loan.

Loan Documents

• Standard home purchases involve both a mortgage and a promissory note.
• Together, these documents cover loan amount, interest rate, payment terms, and the borrower’s repayment obligation.

Key Elements of Security Instruments

Understanding the different aspects of security instruments can help buyers, sellers, and lenders establish agreements that benefit everyone:

Involved Parties

Clarify who is involved in the transaction. This may include the buyer, seller, borrower, lender, or trustee. If any party represents an organization, such as a bank, include the name of the representative, their title, and the organization’s details.

Property Description

Describe the property in detail. This may include an address, lot number, or other location description for real estate transactions. If your security instrument is for a motor vehicle or other property, include the VIN, serial number, or additional identifying information.

This section should describe any damage or other existing conditions at the time of sale.

While the promissory note or purchase agreement provides loan and repayment details, you should also include the following loan information in your security instrument:

• Loan amount
• Interest percentage and capitalization
• Repayment amount
• Installment schedule
• Specific conditions relating to the loan and repayment

Default and Foreclosure

Explain the consequences of default. This section should clarify the specific time frames for default and what remedies are available to the lender or seller should the buyer violate the payment terms.

Describe forfeiture, foreclosure, penalties, and potential legal action here. Be detailed about the forfeiture, selling, or foreclosure process and the options available to both parties. Include any information about arbitration or other forms of alternative dispute resolution.

Legal remedies for default and foreclosure may differ by state, so check your state laws before signing a security instrument for a real estate or other property transfer.

The borrower and lender may sign the security instrument, depending on the details of your transaction. Review state laws to understand the signature requirements for legal documents like promissory notes and loan agreements.

When a mortgage is used as a security instrument, who holds the mortgage and the promissory note?

The lender holds the mortgage and promissory note when a mortgage is used as a security instrument. If there is a trustee, they will hold the title to the property until the loan terms are satisfied. 

Who signs the security instrument?

The borrower and lender sign the security instrument when it is a mortgage or deed of trust. The buyer and seller sign if it is an installment land contract.

What’s the difference between a security instrument and a loan agreement?

The difference between a security instrument and a loan agreement is that a loan agreement establishes the payment terms for the loan, while the security instrument establishes a way for the lender to enforce the agreement and recover the loan value if the borrower defaults.

What’s the difference between a security instrument and a promissory note?

The difference between a security instrument and a promissory note is that a promissory note documents the amount and terms the borrower agrees to pay. The security instrument establishes collateral for the lender to recover the agreed amount if the borrower fails to meet the promissory note terms.

What’s the difference between a security instrument and a security interest?

A security interest is the lender’s right to the buyer’s assets. It is established by a document that confirms the lender’s security interest. This document is commonly referred to as a security instrument. Therefore, the security instrument is what establishes the lender’s right to the buyer’s assets, resulting in a security interest.

Josh Sainsbury

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Josh Sainsbury is a business content editor at LegalTemplates. His background in a variety of industries allows him to create legal content that’s accessible and understandable for all audiences.

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Security Instrument Definition

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Table of Contents

• What Is a Security Instrument?
• How Security Instruments Are Used in Real Estate
• Who Signs the Security Instrument?
• Security Instrument: Similar Terms Compared
• A security instrument secures a loan’s promissory note , giving its holder the legal claim to the collateral when the borrower fails to repay the loan.
• In real estate, a security instrument can be a mortgage or a deed of trust signed by the borrower and lender.
• Security instruments aren’t as negotiable as promissory notes, but, in some cases, the terms can be adjusted to include a third party who can step in when the borrower can no longer make payments.
• Although a security instrument and a promissory note are separate documents, they should coexist to make a loan secured.
• Every mortgage gives its holder a security interest in the property backing the loan, while every security interest comes from a security instrument.

A security instrument is used in real estate to give a lender a security interest in a particular property.

An example of a security instrument in real estate is a mortgage (or, in some states, a deed of trust ), which a borrower uses to finance the purchase of a home. The lender holds the mortgage, giving them a security interest in the property that serves as collateral . It entitles the lender to seize the house and resell it to recoup its investment when the initial buyer fails to fulfill their obligations under the loan terms.

In a typical home loan, the lender issues two documents: the mortgage and the promissory note. These loan documents work together to lay out the specifics of the home loan. The former spells out the home loan terms, such as the amount and interest rate. But, more importantly, it puts the unconditional promise to pay what is owed within a certain period in writing.

Although this written commitment to repay is legally binding, the collection process becomes more complicated when such agreements have no accompanying security instrument.

If a lender only holds a promissory note and the borrower defaults, the bank needs to sue said borrower and go after their assets until the losses are recouped. But if the assets’ value isn’t enough to satisfy the loan balance, the lender has no choice but to charge it to experience[1].

A security instrument (in this case, the mortgage) is thus important because it secures the note. It creates a lien on the property, giving the lender a legal claim. If the creditor has a security interest in the home, they can foreclose on the property in accordance with state law[2] to get paid.

Every mortgage creates a security interest, but not every security interest comes from a mortgage since not every security instrument is a mortgage. They can originate from any secured loan like auto financing or car title lending.

Mortgage vs. Deed of Trust

As mentioned, mortgages and deeds of trust are the best security instruments. These legal documents apply to home loans, although they’re not always available for lenders everywhere. Some states prefer one or the other, while some jurisdictions accept both[3].

A mortgage transaction involves only two parties: a homebuyer and a home loan lender. A mortgage without a power of sale clause requires the creditor to seek judicial supervision to foreclose on the home[4]. Conversely, a mortgage with power of sale written on it permits the lender to take possession of the property with no judicial order and proceed to the sale immediately.

On the other hand, a deed of trust includes an impartial third party: the trustee. The role of a trustee in a home loan is to hold the legal title [5] to the property until the debt is paid off. The equitable title to the house stays with the homebuyer, but they only become the legal, unencumbered owner when the financial obligation is fulfilled to its end. A deed of trust comes with a power of sale, which allows the trustee to put the property on sale when the borrower defaults. The lender notifies the borrower of the sale of property, which the borrower can then challenge in court should they find the grounds to do so[6].

In general, the borrower and lender may sign the security instrument.

When one borrows money to buy something and uses credit information to qualify for a loan, that person has to put their signature on this document and the promissory note.

Likewise, the name of the lender will appear on the security instrument, so the lender usually signs it as well. However, they don’t need to sign the note, just the security instrument.

Moreover, using a third party like a co-signer[7] or guarantor to beef up loan qualifications doesn’t require them to sign the security instrument. The document doesn’t even need to mention the third party at all.

Is a Security Instrument Negotiable?

A security instrument is negotiable because one may bargain with a creditor to use a third party to reduce the risk everyone has to take. After all, a co-signer or a guarantor is a form of security too.

However, borrowers can’t expect a lender to pass up security when borrowing an amount that usually merits a secured loan. Unless the homebuyer has extraordinary credentials, they won’t usually find a lender to help finance a big purchase without a security instrument.

What can be negotiated are the contents of a promissory note. Borrowers can negotiate a better deal when applying for, renewing, or refinancing a loan.

Depending on creditworthiness and the prevailing market conditions, one can snag a lower interest rate[8], extend or shorten a repayment term, decrease the down payment requirement, or eliminate some closing costs[9].

Some similar terms may confuse people, as described below.

Security Instrument vs. Loan Agreement

A loan agreement isn’t a security instrument. A loan agreement is another term used to refer to a promissory note. It may also go by other names, such as a credit agreement, a loan contract, or a financing agreement.

Security Instrument vs. Note

The difference between a security instrument and a note is that a note is short for a promissory note.

The security instrument and promissory note are separate legal documents a person has to sign when taking out a secured loan.

The holder of a loan’s note gets to receive the monthly payments. If a lender sells it to someone else like an investor, the interest earnings it generates will go to its new owner[10].

Since the note and security instrument are paired with each other, the legal rights to the underlying collateral backing the loan go to whoever owns the debt. So when a secured note changes hands, its corresponding security instrument follows suit.

Security Instrument vs. Security Interest

A security instrument is a legal document that creates or provides evidence of security interest, while security interest is a legal right or claim a lender has over a borrower’s property.

In other words, a security instrument is a document that validates or proves a lender’s security interest in an asset or property.

• Haman, E. (2023,  February 1.) Secured promissory note vs. unsecured promissory note . LegalZoom. Retrieved from https://www.legalzoom.com/articles/secured-promissory-note-vs-unsecured-promissory-note
• Foreclosure Laws and Procedures: 50-State Survey . (2022, November 29.) Justia. Retrieved from https://www.justia.com/foreclosure/foreclosure-laws-and-procedures-50-state-survey/
• Sherman, F. (2010, June 25.) Mortgage State vs. Deed State . SF Gate. Retrieved from https://homeguides.sfgate.com/mortgage-state-vs-deed-state-1362.html
• Harding, C. (2021, October 30.) Judicial Foreclosure: An Overview . Upsolve. Retrieved from https://upsolve.org/learn/judicial-foreclosure/
• Legal Title vs. Equitable Title . (2022, June 13.) Study.com. Retrieved from https://study.com/learn/lesson/legal-vs-equitable-title-overview-differences-applications.html
• Do procedural defects in the assignment of a trust deed allow a foreclosed owner to challenge its assignment? (2016, March 28.) firsttuesday Journal. Retrieved from https://journal.firsttuesday.us/do-procedural-defects-in-the-assignment-of-a-trust-deed-allow-a-foreclosed-owner-to-challenge-its-assignment/51524/
• What is a co-signer? (2021, June 23.) Consumer Financial Protection Bureau. Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-co-signer-en-745/
• Calonia, J. (2022, August 25.) How to Negotiate Lower Interest Rates on Your Credit Cards, Student Loans, and Mortgage . FinanceBuzz. Retrieved from https://financebuzz.com/how-to-negotiate-lower-interest-rates
• Zinn, D. (2022, July 20.) How to negotiate your mortgage closing costs . Bankrate. Retrieved from https://www.bankrate.com/mortgages/how-to-negotiate-closing-costs/
• Passive Income from Investing in Notes, Be The Bank . (2018, April 17.) Passive Income MD. Retrieved from https://passiveincomemd.com/passive-income-from-investing-in-notes-be-the-bank/

Related terms

Asset-based loan, cross collateralization, security interest.

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Security Instruments Explained: A Comprehensive Guide

In the intricate web of financial transactions, security instruments emerge as the linchpins. These legal documents, often associated with loans, ensure that borrowers adhere to their commitments. They act as a safety net for lenders, providing a legal recourse should borrowers default on their obligations. Their significance is not just limited to banks or financial institutions; they play a pivotal role in everyday transactions, from buying homes to setting up businesses.

Defining Security Instruments

Security instruments are legal contracts that provide lenders with a claim on assets owned by the borrower. Their primary purpose is to safeguard the lender's interests. There are various types, each tailored to specific financial scenarios. Mortgages, for instance, are security instruments that use real property as collateral. Promissory notes, on the other hand, are written promises to pay a specific amount by a set date.

Historical Context

Tracing back through history, the concept of security instruments isn't new. Ancient civilizations had rudimentary forms of these agreements. Over time, as trade and commerce flourished, the need for more structured and legally binding instruments arose. Key milestones include the introduction of standardized contracts and the establishment of public recording systems, ensuring transparency and trust in financial dealings.

Who Uses Security Instruments?

From mega-corporations to individual consumers, security instruments are ubiquitous. Financial institutions rely on them to minimize risks associated with lending. For borrowers, they might be a pathway to homeownership or a means to finance a new venture. Real estate developers, too, navigate these documents, ensuring properties are free from liens before transactions.

What Are the Different Types of Security Instruments?

While mortgages are the most recognized, the world of security instruments is vast. Deeds of Trust, often used in place of mortgages in some jurisdictions, involve three parties: the borrower, lender, and a neutral trustee. Promissory notes are straightforward – they're promises to pay. Liens, another type, give creditors a claim on assets until debts are settled.

When Are Security Instruments Used?

Their use isn't limited to the inception of a loan. They come into play during property sales, ensuring no hidden debts are associated with the property. In scenarios of debt restructuring, these instruments are revisited and often modified to reflect new terms.

Where Are Security Instruments Recorded?

Transparency is paramount. Hence, these documents are recorded in public databases, like the County Recorder's Office. In today's digital age, many jurisdictions also maintain online databases, making access and verification easier than ever.

Why Are Security Instruments Essential?

Beyond the obvious protection they offer lenders, they instill a sense of accountability in borrowers. They're also pivotal in real estate, ensuring properties exchanged are free from encumbrances.

How Do Security Instruments Work?

It begins with drafting a document that outlines terms agreed upon by both parties. Once executed, it's legally binding. If a borrower defaults, the instrument outlines steps for enforcement. Once obligations are met, a release document is often recorded, signifying the end of the agreement.

Key Elements of Security Instruments

Every instrument outlines the principal amount borrowed and the interest rate. It also details the terms of repayment and what constitutes a default. Provisions are in place outlining potential foreclosure processes in case of defaults.

Understanding Collateral

Collateral acts as a lender's safety net. In the event a borrower defaults, this tangible asset can be seized or sold to recover the owed amount. The type of collateral varies; it could be real estate, stocks, or even valuable artifacts. Before accepting collateral, lenders often require a valuation or appraisal. This ensures the asset's worth aligns with the loan amount. Not all assets qualify as collateral; typically, it must be something of significant value that can be easily liquidated.

Rights and Obligations of Parties

Every security instrument delineates the rights of the lender and the obligations of the borrower. Lenders, for instance, have the right to seize collateral if borrowers default. They can also impose penalties for late payments. Borrowers, on the other hand, are obligated to make timely repayments and maintain the collateral (like home insurance for a mortgaged property). Sometimes, third parties, such as trustees in a Deed of Trust, play roles in ensuring the agreement's terms are met.

Legal Framework

Security instruments operate within a legal framework. This framework is shaped by both federal and state laws, and it ensures that both lenders' and borrowers' rights are protected. Jurisdictions might have variations in their laws, so it's crucial for parties to be aware of local regulations. Over time, as the financial landscape evolves, laws are amended. Staying updated on these changes is vital for both lenders and borrowers.

Challenges and Controversies

No system is without its challenges. In the realm of security instruments, disputes might arise over unclear terms or disagreements about property valuations. Some legal battles have set precedents, shaping the way future agreements are drafted. Moreover, ethical considerations come into play, especially when foreclosure looms. Are lenders too quick to seize properties? Are borrowers given ample opportunities to rectify their defaults?

Innovations in Security Instruments

The digital age has ushered in a wave of innovations. Automation and artificial intelligence are streamlining processes, from drafting documents to recording them. Modern lending practices, influenced by fintech, are reshaping traditional views on security. As we look to the future, blockchain's potential in this sector is being closely watched, promising transparent and tamper-proof agreements.

Case Studies

Real-world examples offer invaluable insights. There are instances where security instruments played pivotal roles in salvaging sinking businesses or enabling first-time homeowners to buy their dream homes. Conversely, lessons can be gleaned from failed agreements, highlighting pitfalls to avoid. These case studies, rich in practical knowledge, often serve as guides for both lenders and borrowers.

Tips for Borrowers

Navigating the maze of security instruments can be daunting. However, with due diligence, borrowers can make informed decisions. It's always advisable to seek legal counsel before signing any agreement. Understanding the fine print, being aware of all obligations, and knowing one's rights can prevent potential disputes.

Tips for Lenders

For lenders, the onus is on ensuring compliance with all laws. Adopting robust risk management strategies can shield against potential defaults. However, beyond the legalities and risk, building a rapport with borrowers is invaluable. Trust and transparency foster long-term relationships, beneficial for all parties involved.

Security instruments, while complex, are integral to the financial world. They balance the scales, protecting lenders while ensuring borrowers adhere to their commitments. As we move forward, it's evident that these instruments will continue to evolve, adapting to the ever-changing financial landscape.

Further Reading and Resources

For those keen on deepening their understanding, a plethora of resources awaits. Books like "The Art of Secured Lending" or online courses such as "Decoding Security Instruments" offer in-depth knowledge. Podcasts featuring industry experts provide real-world insights, making the subject more accessible to all.

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