Defeasance clauses are contractual requirements in some states that ensure the buyer receives the title to the property once the mortgage is paid in full.
If you don’t know, a clause designates a specific section of a real estate contract. Real estate clauses come in a variety of forms, and you’ll probably see a lot of them on your exam.
What is the Defeasance Clause?
Defined: The defeasance clause is a necessary contract clause that guarantees that the buyer receives the title to the property once the mortgage is paid in full.
To put it another way, a defeasance clause is a clause in a mortgage that permits a home buyer to redeem all of a property’s rights after making the final mortgage payment. It basically states that after the mortgage is paid off, the lender must relinquish all ownership of the property. At this point, the buyer gets title to the property.
Now, it’s important to remember that this clause only applies in some states. As we all know, each state has its own real estate laws. Title theory states like California, Colorado, North Carolina, and many others have defeasance clauses.
According to title theory, banks or mortgage lenders retain ownership of a property until all debts are paid in full. In these states, the mortgage should contain a defeasance clause.
But in states that adhere to the lien theory, banks or mortgage lenders never hold onto the title to the property. Instead, the mortgage lender holds a lien against the property.
What to Know for the Real Estate Exam
For the real estate exam, it’s crucial to comprehend that, like other clauses, you must keep in mind what the defeasance clause is.
Keep in mind that the defeasance clause ensures that the buyer receives the title to the property once the mortgage is paid in full.
You might be asked to choose which-is-which from a list of various contract clauses in an exam question.
Who does a defeasance clause protect?
A defeasance clause exists to safeguard the interests of the home buyer, which is one of its intended beneficiaries. When the borrower repays the loan, the lender is obligated by law to transfer all property rights to the purchaser. The purchaser then becomes the sole and complete owner of the property.
What is a Defeasible clause?
The lender receives a defeasible title to the property under the mortgage theory. If the terms of the mortgage agreement were followed, the defeasance clause would “negate” the lender’s security and enable the borrower to reclaim ownership of the property.
Why do borrowers defease loans?
By using assets that generate the same cash flows as the original loan, borrowers can replace the collateral on their loans thanks to defeasance. With the help of this asset exchange, lenders can maintain their expected yield for the duration of the loan without having to look for new lending opportunities to replace the prepaid capital.
What does a defeasance clause in a mortgage provide for quizlet?
The only legally necessary clause in a mortgage is the defeasance clause. Due to the requirement that the lender acknowledge the borrower’s performance, it offers protection from the borrower. As long as the borrower complies with the agreement, it restrains the lender’s rights.