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Key Mortgage Clauses You MUST Know | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
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hey everybody my name is paul pacheski
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and welcome to the real estate classroom
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youtube channel hey before we get
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started on today's video
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over common loan clauses that you need
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to know for your real estate exam
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hey do me a favor give this video a
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thumbs up hit that red subscribe button
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comments section on
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of this channel don't forget to share
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this with somebody
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okay let's get to today's video
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so in today's video we're going to
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discuss seven common
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contingencies or seven common lone
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clauses
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that are really paramount in just about
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any any
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loan document including a mortgage a
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deed of trust or even a land contract
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and those seven clauses are due on sale
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clauses
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sometimes known as an alienation clause
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we have the acceleration clause
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the defense clause the release clause
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the prepayment penalty clause
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a subordination clause and then finally
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what's called an assignment of rents
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clause
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all seven of these clauses are very
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important for you to know for your real
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estate licensing exam
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and so we're going to touch on each one
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of these
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now the first one i want to talk about
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is what's called a do on
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sale clause and here's the thing to
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remember
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there's another term or another way that
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it can be used and that is called an
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alienation clause so you have to know
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that these two things are the same thing
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and they're used interchangeably i've
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seen
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i've seen them go both ways in loan
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documents all right but the thing to
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remember is
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alienation means transfer so
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when this do on sale clause or
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alienation clause is included in a
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mortgage
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uh promissory note or or a d tr i'm
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sorry a d
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trust or a land contract then it
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requires that the loan balance
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be paid in full when now there's a
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trigger here so the loan balance will
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have to be paid in full
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if title to the property is passed
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and this is interesting because most of
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the time people will just say well that
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means
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the loan is paid off but that doesn't
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really necessarily
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necessarily always mean that so for
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example
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it is not very common but a lot of
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investors like to use this somewhat
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shady technique of what we call
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taking a property with subject to
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meaning subject to the due on sale
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clause not being in
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invoked by the lender and so there is a
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loan against the property
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and the seller is in distress or
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whatever the case may be
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and the transfer title over to somebody
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else but they
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don't pay pay the loan off so transfer
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of title has occurred
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and in that case what will happen is the
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bank has the right
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excuse me under the due on sale clause
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to then go to that borrower and say well
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you owe us this amount of money and it's
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due now
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all right so it's very the key here is
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it protects the lender
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from the the seller selling the property
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and transferring title
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and not paying off the loan the other
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thing is
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typically when loans
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include any kind of due on sale clause
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they are not assumable
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loans the next clause we're going to
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talk about is called an acceleration
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clause and it allows the lender to
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declare the entire balance due
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immediately
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upon default of the borrower meaning the
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borrower stops making their payments
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but it also does include other breaches
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as well
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so for example let's say that the the
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the borrower
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has stopped making property tax payments
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or they
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stop paying their homeowners insurance
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or
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they stop maintaining the the property
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as far as material condition goes
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all of those are triggers in which the
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lender can then accelerate the amount
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that's due
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and and basically declare that the
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entire balance is due now
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another thing that it allows the lender
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to do is to accelerate
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uh the the balance due if the lender
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finds out that the
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that there has been a higher lien that's
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been placed against the property so for
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example
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a a tax lien for example is considered
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to be a higher priority lien than the
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mortgage
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and and that means it becomes a senior
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lien against
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or or against the the lender and
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therefore the lender could then use the
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acceleration clause to declare the
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entire
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balance due now due on sale remember the
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difference due on sale
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clause permits the lender to declare the
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entire amount
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due if the the borrower
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transfers title the acceleration clause
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allows the lender to declare the amount
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immediately due if they stop making
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payments
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or some of the other things that we
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discussed
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number three is a defense clause it's
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kind of funny defense clause and you
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have to understand that the root word
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here
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is defiance which means defeat and this
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is when a mortgage is declared null and
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void
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or no longer enforceable or defeated if
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you will
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when the promissory note or the loan
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against the property has been paid in
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full
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so essentially when the borrower pays
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the property off
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this is a legal mechanism that says that
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the lender has
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no more interest in the property and
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therefore
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their mortgage is now defeated it's it's
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a it's more of a legal legality or a
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technical part of
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of the uh the loan but it is nonetheless
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very relevant and something that you
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have to know so that is a defense clause
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number four a release clause or
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sometimes known as a
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partial release clause and if you
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watched a previous video that
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where we talked about the non va
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fha type mortgages we discussed a
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type of mortgage called a blanket
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mortgage and in a blanket mortgage it
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allows for example a
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sub-divider or a developer to
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that's that's creating or developing a
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subdivision
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to go to the bank and say listen i want
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to get a million dollar loan
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and as each parcel within that
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subdivision
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is developed and and sold off then it
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allows for a partial release
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so that individual lien against that
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individual parcel of land
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is released by the lender so it's a
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mechanism that allows
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individual lots or individual parcels to
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be released
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in a blanket mortgage and these are very
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common in blanket mortgages and quite
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honestly
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i'm really not sure that there's any
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other type of mortgage where i have seen
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something like this other than a blanket
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mortgage
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the fifth one is what we call a
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prepayment penalty clause
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now this permits the mortgagee there's
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one of those key real estate terms i
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know you've heard this before
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but remember the mortgagee is the lender
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and the mortgage or
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is the borrower have to know those
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you have to know those for your real
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estate licensing exam
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so the prepayment penalty allows or
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permits the mortgagee
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to charge a penalty uh
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to the to the mortgage or if the loan is
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paid off
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early now the prepayment penalty clause
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will
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also describe or outline what that
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prepayment penalty is
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and also remember that most federally
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backed loans
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won't have these prepayment penalties so
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va loans
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or fha loans they will not have these
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included but essentially what will
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happen is
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the most common that i have seen is so a
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prepayment penalty is typically from two
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to five
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years most common it's two to three
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years so it simply means that the
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borrower is going to pay x amount of
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money you know four or five
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six thousand dollars or a certain
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percentage of the
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uh of the amount of the loan in a
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penalty if they pay it off within
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you know 36 months or 48 months those
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type of things
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and it kind of protects the lender from
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the borrower in in an environment where
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interest rates are falling rapidly there
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have been times in my real estate career
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when
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interest rates or mortgage rates fell so
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quickly that
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literally people refinanced in a two or
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three four times in a one-year period
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and putting the prepayment penalty in
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there is a way to
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buffer against that buffer the lender
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against that activity
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number six is a subordination clause and
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i also spoke about this in a previous
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video as well
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it requires any existing or future
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mortgage lien to be
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second in priority or what we call
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subordinate or
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be in a lower priority to to this
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loan so if you went out and got a first
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mortgage and then you went out and got a
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second mortgage
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to maybe put in uh you know to do
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improvements to the property that second
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mortgage is in
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second priority but let's say you
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refinance this first one
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well if you refinance the first one what
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happens is that will move that second
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mortgage
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up to first priority and
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most lenders don't like that so if
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you're going to refinance your first
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mortgage
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then whoever you're refinancing with is
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going to require
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the second mortgage to subordinate it's
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called a subordination agreement
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to guarantee that that new loan is going
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to be
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in first priority that is one one
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aspect of a subordination clause it is
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also used subordination clauses are also
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used in
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commercial leases particularly in leases
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or commercial spaces where there are
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really long-term leases and so think
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about this so let's say a
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a commercial property is paid off and
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the owner the landlord enters into a
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10-year
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lease agreement with a tenant it's
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called a leasehold interest that that
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tenant has well
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let's say that two years into this uh
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lease agreement the the owner decides to
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take a mortgage out against the property
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well
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because the tenant the leasehold
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interest is in first place
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if the lender ever had to foreclose on
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the property
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the lender would then have to
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abide by the the terms of the lease
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agreement
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so it's very common in a commercial
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lease agreement or a commercial lease
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that says that it in the event that the
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owner
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has a mortgage and that mortgage is
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foreclosed upon then it allows the
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lender to
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terminate that lease even if the lace
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lease hasn't expired yet so it's a way
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to protect the lender
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these these subordination clauses are
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very common
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in in commercial leases and the last one
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i want to talk about is called an
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assignment of
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rent and again this protects the
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mortgagee which the mortgagee is the
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lender and the mortgagor is the borrower
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it allows the mortgagee to collect rent
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the
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directly from the tenant in the event
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that the
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that the mortgage or the borrower uh
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defaults on monthly payments this was
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very common
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in 2009 10 11 and 12 when many many
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investors
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got foreclosed on and many investors
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just simply gave up and stopped making
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house payments so you saw a lot of
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lenders notifying
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or going directly to the tenant saying
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from here forward you're going to pay
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your monthly rents
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to us that was very common during that
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that time period and it's just a way to
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protect
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the lender because not having that
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you know an owner could stop making
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payments
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but continue to collect rent and in some
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states that with their foreclosure laws
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it may take up to two or three years to
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actually foreclose on the property
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depending on
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the state that the property is located
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in so it was
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it's just a way for the lender to
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protect themselves against the
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borrower's default
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well there you have it those are the
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common alone clauses that you're going
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to see in loan documents but hey real
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quick if you are
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continuing your studies don't forget to
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check this video out it kind of
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dovetails into what we've been talking
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about in this video
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and if you have not subscribed to our
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channel yet i would appreciate you doing
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that click the little
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circle to my left and that's all i got
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for today's video i'll see you next time
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