8.4 Instruments of real estate financing – mortgages, lien, title, mortgage requirements and mortgage clauses

Mortgages: Mortgages are the most common instrument of real estate financing. A mortgage is a loan secured by a real estate property, where the borrower (mortgagor) pledges the property as collateral to the lender (mortgagee). The borrower makes regular mortgage payments, which include principal and interest, over a specified term until the loan is fully repaid.
Lien: A lien is a legal claim on a property that serves as security for the repayment of a debt. When a mortgage is issued, a lien is created on the property, giving the lender the right to foreclose and sell the property to recover the outstanding debt if the borrower defaults on the mortgage payments. Liens can also be created for other reasons, such as unpaid taxes or contractor’s liens for unpaid work.
Title: Title refers to legal ownership of a property. In real estate financing, lenders require the borrower to have clear and marketable title to the property, meaning that there are no other claims or liens on the property that could jeopardize the lender’s security interest. A title search is conducted to ensure that the property’s title is free from any encumbrances or defects.
Mortgage Requirements: Lenders have specific requirements that borrowers must meet to qualify for a mortgage loan. These requirements may include a minimum credit score, income verification, employment history, debt-to-income ratio, down payment amount, and property appraisal. Meeting these requirements helps lenders assess the borrower’s creditworthiness and the property’s value and marketability.
Mortgage Clauses: Mortgage agreements often include specific clauses that outline the rights and obligations of the borrower and lender. Some common mortgage clauses include:
- Acceleration Clause: This clause allows the lender to demand full repayment of the outstanding loan balance if the borrower defaults on the mortgage terms.
- Prepayment Clause: This clause specifies whether the borrower can make additional principal payments or repay the mortgage in full before the term ends without incurring penalties.
- Escrow Clause: This clause requires the borrower to make additional monthly payments to an escrow account held by the lender, which covers property taxes and insurance premiums. The lender then pays these expenses on behalf of the borrower.
- Due-on-Sale Clause: This clause gives the lender the right to accelerate the loan and demand full repayment if the borrower transfers ownership of the property to another party.
- Default Clause: This clause outlines the conditions under which the borrower is considered to be in default, such as failure to make timely mortgage payments, and specifies the remedies available to the lender in case of default.
- Subordination Clause: This clause specifies the priority of the mortgage lien in relation to other liens or claims on the property. It determines the order in which creditors would be paid in the event of foreclosure.