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Real Estate Topic 3

A mortgage is a legal document that secures an obligation by pledging real property. It includes details such as interest rates, repayment terms, and clauses for default and property transfer. Mortgages can be senior or junior, and consequences of default may lead to foreclosure, where the property is sold to satisfy unpaid debts.

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3 views4 pages

Real Estate Topic 3

A mortgage is a legal document that secures an obligation by pledging real property. It includes details such as interest rates, repayment terms, and clauses for default and property transfer. Mortgages can be senior or junior, and consequences of default may lead to foreclosure, where the property is sold to satisfy unpaid debts.

Uploaded by

sadia nusrat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Topic 3: The Mortgage Instrument

1.What is a mortgage and when it is created?


2. How does a mortgage is used and what does it contain ?
3.Properties that are covered by a mortgage
4.After required property clause
5. Senior and Junior mortgages.
6. Purchase Money Mortgage.
7. Mortgage Default and its Consequences.
8. What is foreclosure and how is it pursued ?

1.What is a mortgage and when it is created?

A mortgage is a written document (or instrument).It is created in a transaction


where one party pledges real property (ownership rights in real estate) to
another party as a security for an obligation owed to that party.

2. A mortgage instrument can be used as follows:

I. As a method of financing the purchase of a real estate when the buyer


borrows funds from an institutional lender (a commercial bank, a savings
and an association, a life insurance company and so on) and uses these
and other funds to purchase a property.

ll. The mortgage is accompanied by a promissory note which typically


contains the following clause or covenants:

(a)The interest rate


(b)Repayment terms
(c) Maturity dates
(d)Other clauses involving:

•Notice of default
• Rights of mortgager upon default
• Rights of mortgagee upon default
•Late fees
• Pre payment fees etc.

lll. The promisory note usually contains an acceleration clause which


empowers the mortgager to require immediate and full payment of the
entire amount of debt secured by the mortgages in case of the
mortgager's default.
Without the acceleration clause, the mortgager could only sue for the
amount of the payments currently in default.
Iv. The promisory note may also include a dus-on-sale clause. This clause
requires full payment of the entire debt upon the transfer of the
mortgager's interest in the property without the mortgager's consent.

V. A mortgage may use a printed form or an attorney may dressup a


special form. In any case, the following subjects should always be
included:

(a)An appropriate identification of the mortgager and the mortgagee


(b) A proper description of the property that has a Lion (a legal claim);
(c) Covenants of seisin ( promises concerning state of ownership) and
warranty ( security).

3. The properties that are covered by a mortgage as security for a loan


includes:

(i) The Land;


(ii) Any existing building on the land,
(iii) Easements and fixtures;
(iv) Rights to natural resources,
(v) Rights to rents and profits from the real estate.

4.After required property clause

A mortgage will usually contain what is called an after acquired property


clause. This provision states that property acquired subsequent to the
execution of the mortgage (that becomes part of the Real Estate) is
included in the security covered by the mortgage. After acquired property
includes additional improvements erected on the property. (Senbe
Mortgage)

5. Senior and Junior mortgages.

A property can be mortgaged more than one time. consecutively. In such


case, the first mortgage is called the senior or prior mortgage and all other
mortgages are called Junior mortgages.

In a particular situation, there may be one or more junior mortgages or


none at all.

The first junior mortgage, usually called a second mortgage, is sometimes


used to bridge the gap between the price of the property on the one
hand and the sum of the first mortgage and the money available to the
purchaser for down payment.
Traditionally, second mortgages are short term and Carry a higher rate of
interest because of the additional risk associated with their junior status.
6. Purchase-Money Mortgage

The source of credit for a Real Estate buyer can often be The seller himself.
If the seller is willing to take back a mortgage as part or in full payment of the
purchase price, the seller has what is referred to as a purchase-money
mortgage.

Purchase-money mortgages are common where :

(1) Third-party mortgage financing is too expensive or unavailable;


(2) The buyer does not qualify for long-term mortgage credit because of a
low down payment or difficulty meeting monthly payments;
(3) The seller desires to take advantage of the installment method of
reporting the gain from the sale;
(4) The seller desires to artificially raise the price of The property by offering a
lower than market interest rate on the mortgage, Thereby creating more
capital gains and less interest or ordinary income.

7. Mortgage Default and its consequences

'Mortgage Default' means breach of the mortgage contract. The most


common default is the failure to meet an installment payment of the interest
and principal.

Mortgage Contracts normally indicate definite penalties in case. of a


mortgage default. However, it is often seen that whenever mortgagers get
into financial trouble and are unable meet Their Obligations, adjustments of
the payments or other terms are likely to follow if the borrower and the lender
believe that the conditions are temporary and will be remedied.

In this connection, the term 'workout' is often used. Five alternatives can be
considered in a workout as follows:

(1) Restructuring the mortgage loan’;


(2) Transfer of the mortgage to a new owner;
(3) Voluntary conveying of the title to the mortgagee;
(4) A friendly foreclosure (Sale of property by the court);
(5) A pre packaged bankruptcy.

Before filing the bankruptcy petition, the borrower may agree with the
creditor Concerning the terms on which he/she will turn his/her assets over
the creditor in exchange for a discharge of Liabilities. This can save a
considerable amount of time and expense.
8. "Forclosure and how it can be pursued

Forclosure means the sale of property by the court to satify the unpaid
debt.

Should a foreclosure became unavoidable, the mortgagee may bring a


foreclosure suit and obtain a decree of foreclosure and sale.
If the sale of the mortgaged property realizes a price high enough to meet
the expenses of the sale and the claim of the mortgagee and still leave a
balance, this balance goes to The mortgagor.
On the other hand, if the sale of the mortgaged property can not pay
back the full debt, other properties of the debtor . (The mortgager) may be
brought under the forcleuse decree.

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