If lender approves of new purchaser they may agree to

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°If lender approves of new purchaser they may agree to assumption, or even novation (release of original borrower).Finance Document ProvisionsAlienation clauseFinance Document Provisions Late payment penalty»Late payment penalty: If lender wants to impose a charge for late payments it must be clearly defined in the finance documents.»Late payment penalties aren’t deductible on income tax return.Finance Document Provisions Late payment penalty»On loans for single-family owner-occupied dwellings California law limits late payment penalties to no more than:°6% of the principal and interest due, or°$5 (whichever is greater)And payment can’t be considered late until at least 10 days after due date.
25Finance Document ProvisionsLock-in clause»Lock-in clause: Prohibits borrower from prepayingthe loan (paying it off early.)°Borrower is “locked in” to loan for full term, with no early release.°In CA, residential loans on properties with 4 or fewer units can’tcontain lock-in clauses.Finance Document Provisions Prepayment penalty»Prepayment penalty: Allows lender to impose a penalty if the borrower prepays the loan, to compensate the lender for interest it won’t be collecting. (Lower profit on loan.)°Example: “If borrower prepays more than 15% of loan during 12 month period a prepayment fee of 6 months interest will be charged.”Finance Document ProvisionsPrepayment penalty»Lenders may be willing to waive a prepayment penalty if current interest rates are high.°In that situation, if borrower pays loan off early, lender could make a new loan at a higher rate.
26Finance Document Provisions Prepayment penalty»California places restrictionson prepayment penalties for loans on owner-occupied residential properties (up to 4 units). °Prepayment penalties are generally:§prohibited after first 5 years of the loan, and§amount that can be charged is capped.Finance Document ProvisionsPrepayment penalty»Open mortgage: A loan that doesn’t have any prepayment penalties.°Language may allow borrower to make required payment “or more.”Finance Document Provisions Subordination clause»Subordination clause: Makes it possible for security instrument recorded later to have higher lien priority (than earlier recorded instrument).°Even though lien priority usually decided by recording date, this clause allows subsequent liens to have higher priority.
27Finance Document Provisions Subordination clause»Often found in security instrument for loan to buy vacant land.°Buyer plans to get (future) construction loan, and knows that construction lender will want first lien position.§Higher risk loan usually requires higher lien position.Finance Document ProvisionsDefeasance clause»Defeasance clause: Lender agrees to cancel security instrument when debt is paid, via a lien release.

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