Real Estate Purchase Agreement With Seller Financing Terms Clause Sample Fundamentals of Mortgage Law

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Fundamentals of Mortgage Law

A mortgage is not a loan but an interest in land created by contract. Although almost all mortgage contracts contain a promise to repay the loan, the mortgage itself is not a loan. It can be better characterized as evidence of debt. More importantly, a mortgage is a conditional transfer of a legal or equitable interest in land Not really The interest will be refunded after the terms of the mortgage agreement are fulfilled. A mortgage agreement usually transfers the borrower’s interest in the land to the lender. However, a condition is attached to the transfer: if the borrower fulfills the obligations of the mortgage agreement, the transfer is void. It is for this reason that the borrower is allowed to remain on the title as the registered owner. Practically, he owns the land but the creditor retains the right of interest in the said land.

In essence, therefore, a mortgage is a conveyance of land as security for the payment of the underlying debt or discharge of any other obligation for which it is granted. In a mortgage agreement, the borrower is called the ‘mortgagor’ and the lender is called the ‘mortgagor’.

History of mortgage law

Mortgage law originated in the English feudal system in the early 12th century. The effect of a mortgage at that time was to legally convey to the lender both the title to the land and the ownership of the land. This conveyance was ‘absolute’, subject only to the lender’s promise to re-deliver the property to the borrower if the specified amount was repaid by a specified date.

If, on the other hand, the borrower fails to comply with the terms, then the interest in the land automatically belongs to the lender and the borrower has no further claim or recourse at law. There were basically two types of mortgages in feudal England:ad vivum vadium‘, Latin for ‘a direct pledge’ in which the income from the land was used to pay the debt, and ‘ad mortuum vadium‘, Latin for ‘dead pledge’ where the lender was entitled to the income from the land and the borrower had to raise funds elsewhere to repay the loan. Whereas at first only ‘living pledges’ were legal and ‘dead pledges’ were considered a violation of usury laws and religious teachings, by the 14th century only dead pledges remained and were all too legal and too religious. And, apparently, they are still very religious in the 21st century.

The express contractual terms of a mortgage

Following is an analysis of the clauses included in most mortgage agreements. However, it should be emphasized that the wording varies from contract to contract, and the types of clauses change to suit the particular types of mortgages being pledged.

[ ] Redemption

When the mortgagor fulfills his obligations under the contract, the mortgage will be canceled and the mortgagor will be obliged to recover the mortgagee’s legal interest.

[ ] Transferability

All covenants made by the mortgagor shall be binding upon him, his heirs, executors and administrators. This is the case whether it is the mortgagee’s legal interest, or by the mortgagee’s heirs, executors, administrators or assigns.

[ ] Personal contract

The contractual promise made by the borrower is his personal contract. Because of this, it does not run with the land, so that the lender can sue the borrower on his personal contract even if the borrower has sold the interest in the land to the mortgagee. In practical terms, this means that unless the original mortgage agreement is valid, the original mortgagee is always liable in full force and effect.

[ ] Title integrity

The Mortgagor confirms and warrants that he is the owner in fee simple and has all the rights and powers of such ownership, including the right to convey the land to the Mortgagor.

[ ] Free and clear

This is the essence of security for debt: the title must be free and clear of all encumbrances (subject to certain legal rights, such as subject to taxation), so that conveyance can take place. After conveyance, the interest is transferred to the lender while the borrower retains possession. But in default, the borrower shall also deliver possession to the lender, subject to any encumbrance of priority. This can be a tax lien or, in the event of default on a second mortgage, a first mortgage.

[ ] More assurances

In default, the lender promises to do whatever is necessary to allow them to obtain title to the property.

[ ] Prior obligations

Apart from statutory encumbrances, the mortgagor must declare any and all charges that are preferred in the mortgage agreement, otherwise the lender expects and has the right to be registered in the first priority.

[ ] Insurance

Mortgage covenants to permanently insure the existing buildings on said land or, alternatively, to provide a cash bond covering the replacement cost of said buildings.

[ ] Release of all claims

Borrower waives any claims it may have against Lender with respect to the Property, except for Borrower’s right to demand recovery when the underlying loan is repaid.

[ ] Acceleration at default

Acceleration is the provision that both principal and interest on a defaulted loan become due and payable immediately at the option of the mortgagee.

[ ] Quiet possession

A condition that, unless defaulted, the mortgagor shall have quiet possession of the said land.

[ ] Omnibus Clause

In default of any payment of any amount due by the mortgagor under the terms of the mortgage agreement, the mortgagor may make such payment and the amount so paid shall immediately be added to the principal debt secured by the agreement and shall bear interest thereon. Rate determined by contract.

[ ] maintenance

The mortgagee has the duty and obligation to keep the land and buildings thereon in good condition and in a proper state of repair and further, he shall not abandon or waste the mortgaged property anywhere. This section is intended to protect the value of the lender’s security.

[ ] Advances

The mortgagee is not obliged to advance any part of the amount sought to be secured by the mortgage agreement. For example, where a portion of the money is advanced and then a builder’s lien is filed against the land, the lender must remove the lien before advancing additional funds. Note that a builder’s lien has priority over a mortgage.

[ ] Sales section

Also known as ‘due on sale’, the mortgagor agrees, at the option of the mortgagee, to pay all principal and interest on the underlying loan upon the sale of the property. This clause effectively prevents the lender from foreclosing on anyone who is ineligible. Obviously, the lender’s other option is not to call the loan if the borrower sells to a buyer acceptable to the lender. In the absence of this clause, the mortgage is always receivable.

Luigi Frascati

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