Mor

tgag

e B

asic

s

Type

s of

Mor

tgag

es

•Ty

pes

of C

olla

tera

l:–

Res

iden

tial

•1

to 4

fam

ily h

omes

(up

to 4

uni

ts)

–C

omm

erci

al

•La

rger

apa

rtmen

ts &

non

-resi

dent

ial

•Pe

rman

ent v

s. C

onst

ruct

ion

–Pe

rm o

n co

mpl

eted

exi

stin

g bu

ildin

gs–

Con

stru

ctio

n lo

ans

finan

ce d

evel

opm

ent p

roje

cts

Gov

ernm

ent I

nvol

vem

ent

•G

over

nmen

t-Ins

ured

(FH

A, V

A)–

Incl

ude

“mor

tgag

e in

sura

nce”

, allo

ws

high

er L

/V

ratio

–M

ore

“red

tape

”, lo

nger

app

rova

l pro

cess

–N

o “d

ue-o

n-sa

le”c

laus

e, m

ay b

e as

sum

able

•C

onve

ntio

nal

–N

orm

ally

max

L/V

=80%

, unl

ess

priv

ate

mor

tgag

e in

sura

nce

(PM

I)–

Maj

ority

of a

ll lo

ans

Term

inol

ogy

•O

wne

rbeg

ins

with

"O",

so:

"...o

r" =

==>

Ow

ner

•"L

esso

r" is

Ow

ner (

Land

lord

), "L

esse

e"

is R

ente

r.•

"Mor

tgag

or" i

s O

wne

r (Bo

rrow

er),

"Mor

tgag

ee" i

s Le

nder

.

Lega

l Stru

ctur

e of

Mor

tgag

es

•M

ortg

ages

hav

e 2

parts

(doc

umen

ts):

–Pr

omis

sory

Not

e: C

ontra

ct e

stab

lishi

ng d

ebt.

–M

ortg

age

Dee

d: S

ecur

es d

ebt w

ith re

al p

rope

rty

colla

tera

l (po

tent

ially

con

veys

title

).•

Two

lega

l bas

es o

f mor

tgag

es:

–"L

ien

Theo

ry" (

mos

t sta

tes)

: bor

row

er h

olds

title

, le

nder

get

s lie

n.–

"Titl

e Th

eory

" (a

few

sta

tes)

: Len

der h

olds

title

.

TYPI

CA

L C

OVE

NA

NTS

&

CLA

USE

S1)

Prom

ise

to P

aySp

ecifi

es p

rinci

pal,

inte

rest

, pen

altie

s, e

tc.,

alon

g w

ith d

ate,

nam

es, e

tc.

2) C

oven

ant t

o A

void

Lie

ns w

Prio

rity

ov

er th

e M

ortg

age

For e

xam

ple,

if b

orro

wer

fails

to p

ay p

rope

rty

tax,

she

is in

def

ault

of m

ortg

age

too,

be

caus

e pr

oper

ty ta

x lie

n ha

s pr

iorit

y ov

er

mor

tgag

e lie

n.

3) H

azar

d In

sura

nce

Borro

wer

mus

t ins

ure

valu

e of

the

prop

erty

(at l

east

up

to m

ortg

age

amou

nt) a

gain

st fi

re, s

torm

, etc

.4)

Mor

tgag

e In

sura

nce

Borro

wer

mus

t hol

d m

ortg

age

insu

ranc

e (u

sual

ly

only

if lo

an is

not

Gov

tins

ured

and

Loa

n/Va

lue

ratio

> 8

0%).

In e

ssen

ce, m

ortg

age

insu

ranc

e w

ill pa

y le

nder

the

diffe

renc

e be

twee

n fo

recl

osur

e sa

le

proc

eeds

and

the

debt

ow

ed to

lend

er, i

f any

. In

effe

ct,G

ovt(

FHA,

VA)

loan

s au

tom

atic

ally

hav

e m

ortg

age

insu

ranc

e fro

m th

e G

ovt.

5) E

scro

wBo

rrow

er re

quire

d to

pay

insu

ranc

e an

d pr

oper

ty ta

x in

stal

lmen

ts to

lend

er in

adv

ance

, who

hol

ds fu

nds

in e

scro

w u

ntil

due

to in

sure

r and

pro

perty

tax

auth

ority

, whe

n le

nder

pay

s th

ese

bills

for t

he

borro

wer

.6)

Ord

er o

f App

licat

ion

of P

aym

ents

Firs

t to

pena

lties

and

exp

ense

s, th

en to

inte

rest

, th

en to

prin

cipa

l bal

ance

. (Th

is im

plem

ents

the

“4

Rul

es”.)

7) G

ood

Rep

air C

laus

eBo

rrow

er m

ust m

aint

ain

prop

erty

in g

ood

repa

ir.

8) L

ende

r's R

ight

to In

spec

tLe

nder

has

righ

t to

ente

r pro

perty

, with

prio

r no

tice

and

at th

e ow

ner’s

con

veni

ence

, to

verif

y th

at b

orro

wer

is k

eepi

ng p

rope

rty in

go

od re

pair.

9) J

oint

& S

ever

al L

iabi

lity

Each

par

ty s

igni

ng th

e m

ortg

age

is

indi

vidu

ally

com

plet

ely

liabl

e fo

r the

ent

ire

mor

tgag

e de

bt.

10) A

ccel

erat

ion

Cla

uses

Allo

w le

nder

to m

ake

the

entir

e ou

tsta

ndin

g lo

an b

alan

ce d

ue im

med

iate

ly u

nder

ce

rtain

con

ditio

ns. N

orm

ally

app

lied

to

defa

ult (

to e

nabl

e le

nder

to s

ue fo

r ent

ire

loan

bal

ance

in fo

recl

osur

e) a

nd to

im

plem

ent a

“due

-on-

sale

”cla

use.

11) "

Due

-on-

Sale

" C

laus

eLe

nder

may

acc

eler

ate

loan

whe

n/if

borro

wer

tra

nsfe

rs a

sub

stan

tial b

enef

icia

l int

eres

t in

the

prop

erty

to a

noth

er p

arty

. Thi

s no

rmal

ly p

reve

nts

mor

tgag

e fro

m b

eing

“ass

umed

”by

a bu

yer o

f the

pr

oper

ty.G

ovti

nsur

ed lo

ans

(FH

A, V

A) u

sual

ly d

o no

t hav

e th

is c

laus

e, b

ut m

ost c

onve

ntio

nal

resi

dent

ial m

ortg

ages

do.

Res

ults

in “d

emog

raph

ic

prep

aym

ent”

(as

dist

ingu

ishe

d fro

m “f

inan

cial

pr

epay

men

t”) o

f res

iden

tial m

ortg

ages

.

12) B

orro

wer

's R

ight

to R

eins

tate

Allo

ws

borro

wer

to s

top

the

“acc

eler

atio

n”of

the

loan

un

der d

efau

lt, u

p to

tim

e of

cou

rt de

cree

, upo

n cu

ring

of th

e de

faul

t (pa

ymen

t of a

ll ba

ck

paym

ents

and

pen

altie

s an

d ex

pens

es re

quire

d un

der t

he lo

an te

rms)

.13

) Len

der i

n Po

sses

sion

Prov

isio

n gi

ving

lend

er a

utom

atic

righ

t of p

osse

ssio

n of

the

prop

erty

in th

e ev

ent o

f def

ault

on th

e lo

an.

Enab

les

lend

er to

con

trol l

easi

ng a

nd c

are

& m

aint

enan

ce o

f the

bui

ldin

g pr

ior t

o co

mpl

etio

n of

th

e fo

recl

osur

e pr

oces

s.

14) R

elea

se C

laus

esSt

ates

the

cond

ition

s fo

r fre

eing

the

real

pr

oper

ty c

olla

tera

l fro

m th

e lo

an s

ecur

ity

(e.g

., w

hen

debt

is p

aid

off t

he le

nder

mus

t re

leas

e th

e pr

oper

ty b

y re

turn

ing

the

mor

tgag

e de

ed a

nd e

xtin

guis

hing

the

lien

or re

turn

ing

the

title

to th

e bo

rrow

er).

Mor

e co

mpl

icat

ed re

leas

e pr

ovis

ions

are

in

volv

ed in

loan

s in

whi

ch th

e co

llate

ral w

ill be

sol

d of

gra

dual

ly in

par

ts o

r par

cels

.

15)E

stop

pelC

laus

eR

equi

res

borro

wer

to p

rovi

de le

nder

with

a

stat

emen

t of t

he re

mai

ning

out

stan

ding

ba

lanc

e on

the

loan

. Thi

s pr

ovis

ion

is

nece

ssar

y to

ena

ble

loan

to b

e so

ld in

the

seco

ndar

y m

arke

t, as

the

iden

tity

of th

e “le

nder

”(th

at is

, the

cur

rent

ow

ner o

r ho

lder

of t

he m

ortg

age

asse

t) w

ill ch

ange

as

the

mor

tgag

e is

sol

d in

the

seco

ndar

y m

arke

t.

16) P

repa

ymen

t Cla

use

Prov

isio

n gi

ving

the

borro

wer

the

right

(with

out

oblig

atio

n) to

pay

the

loan

off

prio

r to

mat

urity

, lik

e “c

alla

ble”

bond

s. T

his

effe

ctiv

ely

give

s th

e bo

rrow

er a

cal

l opt

ion

on a

bon

d, w

here

the

bond

ha

s ca

sh fl

ows

equi

vale

nt to

the

rem

aini

ng c

ash

flow

s on

the

mor

tgag

e, a

nd th

e ex

erci

se p

rice

of

the

optio

n is

the

outs

tand

ing

loan

bal

ance

(plu

s pr

epay

men

t pen

altie

s) o

n th

e m

ortg

age

(i.e.

, wha

t on

e w

ould

hav

e to

pay

to re

tire

the

debt

).

17) L

ende

r's R

ight

to N

otic

e (J

rLoa

ns)

A pr

ovis

ion

in ju

nior

loan

s re

quiri

ng th

e bo

rrow

er to

no

tify

the

lend

er if

a fo

recl

osur

e ac

tion

is b

eing

br

ough

t aga

inst

the

borro

wer

by

any

othe

r lie

n-ho

lder

. Jun

ior l

ien-

hold

ers

may

wis

h to

hel

p to

cu

re th

e de

faul

t or h

elp

wor

k ou

t a s

olut

ion

shor

t of

fore

clos

ure,

bec

ause

juni

or li

en-h

olde

rs w

ill st

and

to lo

se m

uch

mor

e in

the

fore

clos

ure

proc

ess

than

the

seni

or li

en-h

olde

r.

18) S

ubor

dina

tion

Cla

use

A pr

ovis

ion

mak

ing

the

loan

sub

ordi

nate

to

(that

is, l

ower

in c

laim

prio

rity

in th

e ev

ent

of fo

recl

osur

e th

an) o

ther

loan

s w

hich

the

borro

wer

obt

ains

sub

sequ

ent t

o th

e lo

an in

qu

estio

n. O

ften

used

in s

elle

r loa

ns a

nd

subs

idiz

ed fi

nanc

ing,

to e

nabl

e th

e re

cipi

ent o

f suc

h fin

anci

ng to

stil

l obt

ain

a re

gula

r firs

t mor

tgag

e fro

m n

orm

al

com

mer

cial

sou

rces

.

19) F

utur

e A

dvan

ces

Prov

isio

n fo

r som

e or

all

of th

e co

ntra

cted

prin

cipa

l of

the

loan

to b

e di

sbur

sed

to th

e bo

rrow

er a

t fu

ture

poi

nts

in ti

me

subs

eque

nt to

the

esta

blis

hmen

t (an

d re

cord

ing)

of t

he lo

an. T

his

is

com

mon

in c

onst

ruct

ion

loan

s, w

here

the

cash

is

disb

urse

d as

the

proj

ect i

s bu

ilt.

20) C

oven

ant a

gain

st R

emov

alBo

rrow

er (p

rope

rty o

wne

r) is

not

per

mitt

ed to

re

mov

e fro

m th

e pr

oper

ty a

ny p

art o

f the

col

late

ral,

such

as

fixtu

res

atta

ched

to th

e bu

ildin

g.

21) P

erso

nal P

rope

rty

Cla

uses

Prov

isio

ns in

clud

ing

in th

e co

llate

ral s

peci

fied

item

s of

per

sona

l pro

perty

(as

oppo

sed

to th

e re

al

prop

erty

that

is a

utom

atic

ally

incl

uded

in th

e m

ortg

age

deed

). “R

eal p

rope

rty”i

nclu

des

land

and

an

y st

ruct

ures

and

fixt

ures

atta

ched

to th

e la

nd.

“Per

sona

l pro

perty

”inc

lude

s m

ovab

le, n

on-fi

xed

item

s su

ch a

s fu

rnitu

re, m

ost a

pplia

nces

, car

s,

boat

s, e

tc.

22) O

wne

r Occ

upan

cy C

laus

eR

equi

res

borro

wer

to li

ve in

the

hous

e.

23) S

ale

in O

ne P

arce

l Cla

use

Prev

ents

the

colla

tera

l pro

perty

from

bei

ng b

roke

n up

into

par

cels

sol

d se

para

tely

.24

) Exc

ulpa

tory

Cla

use

Rem

oves

the

borro

wer

from

resp

onsi

bilit

y fo

r the

de

bt, g

ivin

g th

e le

nder

“no

reco

urse

”bey

ond

taki

ng p

osse

ssio

n of

the

colla

tera

l whi

ch s

ecur

es

the

loan

. With

out a

n ex

culp

ator

y cl

ause

, the

le

nder

can

obt

ain

a “d

efic

ienc

y ju

dgm

ent”

and

sue

the

borro

wer

for a

ny re

mai

ning

deb

t ow

ed a

fter

the

fore

clos

ure

sale

.

etc.

, etc

. . .

.An

ythi

ng th

e bo

rrow

er a

nd le

nder

m

utua

lly a

gree

on

to in

clud

e in

the

cont

ract

.