Questions and Answers
What is the primary purpose of an alienation clause in a mortgage?
What determines the order in which liens are satisfied in the event of foreclosure?
What is the typical trigger for an acceleration clause?
What is the primary purpose of a due-on-sale clause?
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What is the purpose of a prepayment penalty?
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What type of lien has the highest priority in the event of foreclosure?
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What is an effect of an alienation clause being triggered?
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What is a common trigger for a due-on-sale clause?
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What is the purpose of recording a mortgage lien release with the county recorder's office?
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Which of the following is an exception to the general rule of first lien recorded having priority?
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What is a requirement for lien stripping to occur in a Chapter 13 bankruptcy?
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What is the primary difference between a senior lien and a junior lien?
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What is the typical purpose of a junior lien?
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What is the primary characteristic of a first mortgage?
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What can occur if a borrower fails to obtain a mortgage lien release?
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What is a method of resolving lien priority disputes?
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Study Notes
Mortgage Clauses
Alienation Clauses
- Also known as "due-on-encumbrance" clauses
- Allow the lender to call the loan due and payable if the borrower transfers or sells the property
- May be triggered by:
- Sale of the property
- Transfer of title
- Creation of a new encumbrance (e.g., second mortgage)
- Purpose: to protect the lender's security interest in the property
Lien Priority
- Determines the order in which liens are satisfied in the event of foreclosure
- Types of liens:
- First lien: the lender with the first lien has first priority
- Second lien: subordinate to the first lien
- Junior liens: subsequent liens with lower priority
- Importance: determines the amount of money each lender receives in the event of foreclosure
Acceleration Clauses
- Allow the lender to declare the entire loan balance due and payable if the borrower defaults
- Typically triggered by:
- Failure to make payments
- Failure to comply with loan terms
- Bankruptcy
- Purpose: to enable the lender to quickly recover the loan amount in case of default
Due On Sale Clauses
- Require the borrower to pay off the loan in full if the property is sold or transferred
- Similar to alienation clauses, but focus on the sale of the property rather than transfer of title
- Purpose: to protect the lender's security interest in the property
Prepayment Penalties
- Fees charged to the borrower for paying off the loan early
- May be triggered by:
- Paying off the loan in full
- Making excess payments
- Refinancing the loan
- Purpose: to compensate the lender for lost interest income and other costs
Mortgage Clauses
Alienation Clauses
- Protect the lender's security interest in the property
- Allow the lender to call the loan due and payable if the borrower:
- Sells the property
- Transfers the title
- Creates a new encumbrance (e.g., second mortgage)
Lien Priority
- Determines the order in which liens are satisfied in the event of foreclosure
- First lien has first priority, followed by:
- Second lien (subordinate to the first lien)
- Junior liens (subsequent liens with lower priority)
Acceleration Clauses
- Allow the lender to declare the entire loan balance due and payable if the borrower:
- Fails to make payments
- Fails to comply with loan terms
- Files for bankruptcy
- Purpose is to enable the lender to quickly recover the loan amount in case of default
Due On Sale Clauses
- Require the borrower to pay off the loan in full if the property is:
- Sold
- Transferred
- Purpose is to protect the lender's security interest in the property
Prepayment Penalties
- Fees charged to the borrower for:
- Paying off the loan in full
- Making excess payments
- Refinancing the loan
- Purpose is to compensate the lender for lost interest income and other costs
Mortgage Lien Release
- A mortgage lien release is a document that removes a mortgage lien from a property, issued by the lender when the mortgage is paid in full or refinanced.
- The release must be recorded with the county recorder's office to remove the lien from property records.
- Failure to obtain a release can cause title issues and delay future sales or refinancing.
Lien Priority Disputes
- Lien priority disputes arise when multiple liens are placed on a property, with a question of which lien takes priority.
- The general rule is that the first lien recorded has priority over subsequent liens.
- Exceptions to this rule include when a lien is intentionally hidden or when a junior lien is given priority through a subordination agreement.
- Disputes can be resolved through negotiation, litigation, or mediation.
Lien Stripping
- Lien stripping is a process that removes a junior lien from a property through bankruptcy.
- This can occur when a debtor files for Chapter 13 bankruptcy and the court determines the junior lien is no longer valid.
- Lien stripping is only possible if the senior lien is greater than the property's value, leaving no equity to support the junior lien.
Junior and Senior Liens
- A senior lien, also known as a first mortgage, is the first lien recorded on a property and has priority over all other liens.
- A junior lien, also known as a second mortgage, is any subsequent lien recorded on a property and is subordinate to the senior lien.
- Junior liens are typically used for home equity loans, lines of credit, or other financing.
First and Second Mortgages
- A first mortgage is a primary lien on a property, typically used to purchase or refinance the property.
- A first mortgage is usually the largest lien on the property and has priority over all other liens.
- A second mortgage is a junior lien on a property, used to tap into the equity of the property or to finance other expenses.
- Second mortgages are subordinate to the first mortgage and are repaid after the first mortgage in the event of foreclosure.
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Description
Understand mortgage clauses, including alienation clauses that allow lenders to call loans due upon property transfer, and lien priority determining the order of lien satisfaction in foreclosure.
