A mortgage in disguise definitely doesn’t sound like something you want to apply for; it sounds more like a mortgage that finds you, and not in a good way. Unfortunately, this isn’t too far off from the actual definition. A mortgage in disguise is a transaction that is written or structured to look like an outright sale, deed, lease, option, or some other arrangement but is actually intended to secure repayment of a debt.
In real estate law, courts generally look beyond the name or form of an agreement to determine its true purpose. For example, a financially distressed property owner might convey title to a lender while retaining an agreement allowing the property to be recovered after repayment of money advanced by the lender. Although the documents may describe the transaction as a sale followed by a right to repurchase, a court may determine that the parties actually intended the deed to serve as security for a loan.
When a transaction is found to be a mortgage in disguise, it may be treated as an equitable mortgage, giving the property owner protections that ordinarily apply to a mortgagor. This can be particularly important because a lender generally cannot avoid foreclosure requirements or a borrower’s equity of redemption simply by describing a secured loan as an absolute conveyance. Courts may consider factors such as whether a debtor-creditor relationship existed, whether the purported seller remained in possession, the difference between the property’s value and the amount paid, the parties’ statements and conduct, and whether the owner had a continuing right to recover the property by repaying the debt. The terminology and legal tests vary by jurisdiction, but the central principle is that the substance of the transaction, rather than the label placed on it, determines whether an arrangement is actually a mortgage.
