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Questions and Answers
What is the primary purpose of an alienation clause in a mortgage?
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 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 typical trigger for an acceleration clause?
What is the primary purpose of a due-on-sale clause?
What is the primary purpose of a due-on-sale clause?
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What is the purpose of a prepayment penalty?
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?
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?
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?
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?
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?
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?
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?
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?
What is the typical purpose of a junior lien?
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What is the primary characteristic of a first mortgage?
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?
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?
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.
