What Are Mortgage Clauses?
Mortgage clauses, also known as mortgage terms or loan terms, are the terms and conditions of a mortgage. A mortgage clause is any clause in a mortgage document that affects the rights and obligations of the mortgage borrower.
They provide the lender with certain rights and protections in the event of a default on the loan. Mortgage clauses can vary significantly from one lender to another, so it is important to carefully review the terms of your mortgage contract before signing.
Most mortgage clauses will give the lender the right to demand immediate payment of the full loan balance if the borrower defaults on the loan. Each mortgage lender has the right to change its pre-determined foreclosure terms and amounts, but lenders generally have certain restrictions on the changes they can make.
This is known as an acceleration clause. Other common mortgage clauses include the right of the lender to foreclose on the property if the borrower defaults and the right to require the borrower to maintain insurance on the property.
Mortgage clauses are an important tool for lenders in managing their risk. In addition, some mortgage documents contain pre-set guidelines that cannot be modified. These clauses are known as non-negotiable.
What Are The Types Of Clauses In A Mortgage?
- Prepayment and acceleration clauses:
A pre-payment or acceleration clause allows the lender to demand immediate payment of the entire loan amount if the borrower anticipates that he will not be able to make payments at some point.
This can be caused by a change in the borrower’s financial situation such as a job loss, or because he is moving to another region or country where housing is much more expensive than where he is currently living.
In addition, there may be a circumstance where the lender wants to require his borrowers to maintain insurance on the property. This may be a requirement of the lender to hedge against the risk of property damage or destruction.
- Default clauses:
A default clause is used if the borrower fails to make payments on the loan according to his contractual obligations. A default clause will provide the lender with the right to require immediate payment of the full loan amount. If this is not done, the lender has the right to take legal action and foreclose on the property.
- Termination and renewal clauses:
A termination clause allows a lender to end the agreement with a borrower. The lender can terminate early if he can demonstrate that he has reasonable grounds to do so, such as a significant increase in interest rates, government regulations requiring mortgage insurance or because of serious damage to the property.
A renewal clause allows a borrower to renew the agreement with the lender after a certain period of time has elapsed. The lender may require that the borrower pay a service fee for the renewal.
- Lender’s rights against a borrower:
Under some conditions, a lender can sell his mortgage to another party, or write off the loan. If this happens, the borrower is no longer obligated to make payments or maintain insurance on the property.
In some jurisdictions, borrowers have a constitutional right to refuse such actions by lenders.
- Foreclosure and assignment clauses:
The lender can foreclose on the property if he does not receive full payment of all outstanding funds according to his contractual obligations.
- Assignment clauses:
An assignment clause allows the lender to assign his rights against the borrower to another party. This may occur if the borrower defaults on his payments and the lender wants to sell these rights to a third party who is interested in taking possession of the property.
The assignment clause will also include a provision that allows such assigning of rights to occur automatically if such a default occurs.
- Due diligence clauses:
These clauses may be included in mortgage contracts because they are required by government regulation or by lender policy. A lender may require the borrower to provide certain records and payment before the loan is approved. If not, he will have the right to refuse to approve the loan.
- Community property laws and community property rights
A mortgage is usually a joint account, so if one spouse defaults on a mortgage, both spouses are liable for the debt. This can make repayment difficult for some couples because it is often necessary to come up with money that is not legally theirs in order for them to pay their share of the mortgage.
Also, if one spouse does not contribute to his share of mortgage payments, he may become responsible for part or the entire loan amount with respect to his own property.
- Sale and foreclosure because of adverse possession:
Though adverse possession is not a legal right, in some jurisdictions, it may be possible for a person to foreclose on the property in which he has had exclusive possession, even if he did not purchase the property, if there is no evidence that the property was abandoned.
This can occur when a person who had an adverse possession claim does not bring such a claim before the courts until after the property has been sold or foreclosed upon by another party.
This can result in the sale of his own property without his knowledge because of his failure to take action against another party who has been in control of the property.
- Reverse mortgage:
This is a loan that uses the equity in the homeowner’s home to pay the mortgage. The borrower can use this money to pay off other debts or live off while the property is rented.
- Escrow account:
This is an account that is used to hold the money that is being borrowed. The money is transferred from the lender to the escrow account and then sent to the borrower each month.
- Mortgage insurance:
This is a policy that the lender takes out to cover the cost of the loan. This policy protects the lender in the event that the borrower doesn’t repay the loan.
How Do Mortgage Clauses Protect Lenders?
Mortgage clauses protect lenders by preserving their rights to collect on the loan, and by preventing the borrower from taking any action that would prevent the lender from foreclosing on the property.
- Loan prepayment penalty:
A penalty is incurred if the borrower pays off the loan before the due date. The penalty will be calculated by an index that will rise as interest rates decrease over time. The penalty is based on the interest rate and the number of months remaining on the loan (12 months in most cases).
- Sale, assignment, or servicing fees:
If a mortgage is sold or assigned without a clause, it may be difficult for the new owner to continue making payments because any payments that were not deducted from the previous owner’s mortgage may no longer be available to make.
- Default and foreclosure clauses:
If the borrower does not make payments, the lender will have the right to take action against him. This must be done in a timely manner so that the lender does not lose his right to collect on the loan.
- Lender’s rights against borrower:
A borrower can be held liable for all of the debt if he breaks any of the terms of an agreement or if action is taken against him by another party because of his default on payments or maintenance on the home. If this happens, the lender will have the right to sell his mortgage to another party.
- Assignment clauses:
The borrower may give his rights against another party to sell his home. This process is called an assignment and should be noted in writing and signed by both parties.
- Due diligence clauses:
These protect lenders by making sure that a bank or other mortgage company knows about changes in income or address so that payments are not sent to the wrong person or address. If payments are sent to the wrong person or address, they must be returned immediately.
- Community property laws and community property rights:
States vary on how they define community property and what happens in the event of a divorce. However, most states recognize that if one spouse does not make payments, both spouses can be held liable for the debt. This will secure the lender’s mortgage.
Mortgage clauses are used to protect lenders by making sure that borrowers do not default on payments, are held liable for their debts, cannot sell or transfer their mortgages, and do not leave the lender vulnerable to losing his rights to collect on the loan.