Clauses

Due Diligence Clause

1. A buyer who makes an offer contingent on obtaining financing must use due diligence in seeking such financing 2. A time period in which a buyer is given the opportunity to have experts inspect the property, examine the title, and review the leases to determine whether the property matches the buyer's needs.

Escalation Clause

A clause allowing the lender to raise the existing interest rate - although most often associated with an Adjustable Rate Mortgage, it can be used to overcome an alienation clause

Subordination Clause

A clause in which a holder of a mortgage permits a subsequent mortgage to take priority. It is the act of yielding. The clause provides that if a prior mortgage is renewed, the prior mortgage will continue in its subordinate position and will not automatically become a higher or first mortgage.

Assumption Clause

A clause outlining the obligations of the original borrower and a new borrower in the event the loan is assumed

Prepayment Clause

A clause stating that the borrower can pay the entire amount or the stated amount prior to the due date in the note and whether there will be a penalty associated with that prepayment

Defeasance Clause

A clause stating that the lien on the property is defeated when the debt is repaid

Cross-Defaulting Clause

A clause which states that in the event of a borrower default on the primary instrument, the secondary instrument is automatically defaulted. Protects a subordinate lien holder by allowing him or her to foreclose a property of the first lien when into default.

Lock-In Clause

A condition of a mortgage loan which prohibits prepayment of the loan prior to a certain date. Often used in conjunction with prepayment penalties/privileges in the same loan to allow the lender to exert a measure of control over the repayment schedule of the loan

Straight Assumption

A new borrower assumed the payments and liability on an existing loan and usually releasing the original borrower from liability

Assumption "Subject to"

A new borrower assumes the payments but NOT the liability on an existing loan- the original borrower remains liable

Acceleration Clause

A provision written in a mortgage or note, stating that in the event of default, the entire amount of the principal becomes due and payable.

Release Clause

Allows for a portion of the loan to be paid in exchange for the lender releasing a part of the property from the mortgage. Often used by developers who develop raw land and sell lots to builders and individuals

Prepayment Privilege Clause

Allows the borrower to pay of the loan prior to the due date without incurring penalties. This can be advantageous to a borrower in cases where interest rates are falling and the loan can be refinanced at a lower rate without additional cost

Exculpatory Clause

Used to limit the borrower's personal liability in the even of default on a loan.

Lifting Clause

a clause which gives the borrower the ability to replace the primary instrument with another without affecting the subordinate instrument's position. An example would be the refinance of an existing first lien not on a property with a second mortgage. The refinance would not change the priority of the liens, even though the refinanced first mortgage would be dated after the recording of the second

Alienation (Due on Sale) Clause

clause stating that the balance of the debt becomes due if the property is sold by the mortgagor

Nonrecourse Clause

often used by loan originators when selling loans on the secondary market. It protects the seller of the security from liability in the even of a default by the borrower