Finance Instruments - Clauses Flashcards
What does an Acceleration Clause do?
What 4 instances does it apply?
It gives the lender the right to call all sums due and payable on advance of the payment schedule (foreclose) in the event of 4 things.
All sums due and payable may be called on in the event of:
1) Default on an installment payment
2) Destruction (waste) of the premises
3) Placement of an encumbrance on the property
4) Sale or assignment of the property
What is an Alienation Clause (Due-on-Sale or non-assumption)?
What are some of the various terms (4) lenders may approve?
What 2 types of loans do not have Alienation Clauses?
A form of Acceleration Clause preventing sale of the property without the lender’s approval
Lenders may approve various terms. Some:
1) Mortgages/trust deeds allow assumption
2) Allow assumption only if the borrower is creditworthy
3) May allow assumption only at a higher interest rate
4) Forbid assumption altogether (strict Due-on-Sale)
FHA insured and VA-guaranteed loans do not have alienation clauses (i.e., they are always assumable - although they may require the prospective assumer to financially qualify for the loan)
What is a prepayment penalty?
With what 2 types of loans is a prepayment penalty not allowed?
It allows a lender to charge extra interest if the loan is paid off before the normal completion date.
(Ex: You sell your property after 10 years of ownership and your original term was for 30 yrs. Given the length of time most people stay in a home before moving you want to avoid this type of clause)
Not aowes on an FHA or VA loan
What is Subordination?
It surrenders a higher priority for a loan repayment to a subsequently recorded loan (junior lien)
