B. ALIENATION CLAUSE:

This was discussed above in item #A. Borrower no longer has an interest in the property. If a borrower alienates him or herself from a property (sells it and no longer has any interest in the property, he or she is now alien to the title) the lender can force full payment of the loan at that time. It doesn’t matter if the loan has 25 years left, the borrower alienates him or herself from a property it is now, immediately due and payable in full

C. ASSUMPTION:

If the lender allows a buyer to take over responsibility for a loan and releases the original borrower from any liability, this is considered a full assumption. Lenders have the right to qualify a buyer’s financial, credit history, and anything the lender would use to approve a buyer for financing. Lenders may also charge fees, charge loan points for this assumption. If a seller wishes to be released from all liability for a loan, the seller must make sure a Novation Agreement is prepared by the lender releasing the original borrower (seller) from liability. If there is no Novation agreement, the seller will still be secondarily liable for the loan. This means that if the lender can not get money from the new buyer the lender can sue the seller. A Novation is very, very important for a seller. Licensees must be sure that sellers understand this situation. SUBJECT TO means a buyer makes the payments on a seller’s loan. The seller is still responsible for payment. It is generally not allowed in California. Most individuals when purchasing property do not assume or take loans subject to. They obtain new financing.

D. SUBORDINATION CLAUSE: This is a clause normally used when someone purchases a vacant parcel of land. The original seller carries back financing until the buyer is ready to build on the property. At this point the buyer obtains a “construction loan” to pay for the construction. Lenders do not like to be placed in a secondary position (2nd trust deed) and require that the first loan be paid off in order for the lender to become the first trust deed. Buyers usually don’t want to invest the money needed to pay off existing loans. The buyers arrange with the seller that upon obtaining the new construction loan, the seller will allow his loan to become subordinate, or second, to the new construction, or other type of loan. This is agreed upon during the original negotiations of the purchase and a “subordination agreement, or clause,” is included as part of the original agreement. Then, when the construction loan is obtained it is an easy matter to change the order of the loans. The subordination clause allows for subordination of the existing financing and the new loan takes priority in the future.

E. PREPAYMENT PENALTIES: A prepayment penalty is a charge for paying a loan off early. Lenders generally charge six (6) months, but it can be longer, interest to pay the loan off early. Penalties are covered in detail in the text. They were very popular from 1950 to 1980 where competition forced the lenders to stop charging them or lose customers. They are making a comeback and are becoming popular with Adjustable Rate loans and starting to creep into Fixed Rate loans as well.

F. IMPOUND ACCOUNTS: An impound account is a forced savings account for property taxes and insurance. Borrowers with less than twenty (20) percent down are required to make a monthly payment of 1/12 of annual property taxes and insurance charges to a special account to insure that the taxes and insurance will be paid. This is added to the normal principal and interest payment. We refer to it as: P.I.T.I (principal, interest, taxes and insurance) payment. Lenders call these “escrow accounts.” They are collecting and holding funds to pay something at a later date. They are in escrow, a neutral account as far as the bank is concerned. They can pay up to two percent (2%) interest on an escrow/impound, but not all lenders do.

G. ASSIGNMENT OF RENTS: When a borrow defaults on a loan, the lender is not receiving any money. Within a trust deed is a paragraph stating that a lender may contact tenants and collect the rents from them and apply the income to the payment due until a foreclose takes place. This clause is strictly for the benefit of a lender.

SPECIAL PURPOSE TYPES OF LOANS:
1. Graduated Payment Mortgage. A GPM loan is a type of loan where the initial interest rate is fixed (doesn’t change) at a certain amount but the beginning payments levels are set at a lower interest rate. For example; the true rate for a loan is eight percent and the payment starts at a three percent amount for the first year, four percent for the second year, and five percent for the third year. The payment rate increases by one percent until the true rate is achieved. The payments “graduate” until the full payment covers all interest due. During the period of time when the payments are lower and increase yearly the loan is a “negative” amortized loan. The difference between the payment and the interest due is added to the principal balance. Usually, after five years the borrower owes approximately five percent more than at the start of the loan. This is a good loan for first time borrowers who know their income will be increasing and it allows them to obtain housing now and when the loan reaches the full interest the borrowers will be able to handle the full payment amount.
2. Biweekly Mortgage. Instead of making one payment a month, a borrower will pay one half of the payment every two weeks. The borrower will make twenty six payments instead of twelve. This is a loan designed for those who receive paychecks every two weeks and allows them to budget for their loan obligation. As a side benefit, the loan actually pays off sooner because a teeny, tiny extra amount of principal is paid over the course of twenty six payments.
3. Fifteen (15) year Fixed and Adjustable Rate Loans. Instead of amortizing the payments over a thirty year period (360 payments), a fifteen year loan is amortized over fifteen years (180 payments). The fifteen year payments are higher but not twice as much and the loan is completed much more quickly.
4. Reverse Annuity Loans. These have been created for those  sixty two years of age and over. It is exactly what it says; the bank makes the payments to the borrower monthly instead of in one large amount. These act like an income source for the senior who receives a monthly check. The amount of money paid to the senior is all due and payable when the senior moves, dies or somehow vacates the property. Most lenders use a special FHA program for this purpose although a few lenders are creating their own reverse annuity programs for seniors.

1. Length of the lease; Monthly, daily, yearly, etc.

2. Amount of the rent;

3. Names of the parties;

4. Description of the property;

These equal the acronym LAND. It is an interesting fact that leases or rental agreements for LESS than ONE year do not have to be in writing. But enforcing an unwritten rental is very, very difficult in a court of law. It becomes a situation where it one party deniess what the other says. The judge has to try to make sense out of the situation and one party is probably going to be very unhappy with the resulting judgment. In California, the law says all rental/lease agreements for MORE THAN ONE YEAR must be in writing and signed by the lessor; but if the lessee does not sign and moves in and pays rent, he or she is bound by the terms of the lease.

1. Duration; How long is the lease. In the text there are time periods listed for various types of leases such as land, mineral leases, and leases relating to minors.

2. Amount; The amount of rent, money paid for the use of the property must be given and when it is to be paid. Technically, rent is due at the end of a period, but it is allowable to have an agreement where the rent is prepaid on the first of every month. The first of the month (prepaid) is the most common form of rental payment.

If a property is sold while a tenant is in occupancy, the rental amount paid will be divided between the seller, while he or she owns it, and the buyer receives the balance for the period of time left when the buyer owns the property. Example: property sells and closes escrow on 10th of month. Ten days rent will be credited to seller and 20 days rent will be transferred to buyer. This is called proration of rents. All items that are prorated in a sale are based upon a legal month which is thirty (30) days.

3. Security Deposits; Security deposits, cleaning deposits, etc. are deposits of monies given by a lessee to a landlord/lessor for any potential damages that may occur while tenant is in occupancy. If a property is damaged, the lessor may use these funds to repair damage when the tenant vacates a property. The landlord has 21 days from taking back occupancy after a tenant moves or vacates the property. Security deposits may be used for past due rent; or if the tenant leaves personal property behind and the lessor has to store the property; and to repair all damages and then send any remaining deposit to the tenant at any forwarding address. If a property sells, all deposits are transferred to the new owner to be used for appropriate expenses at a future date. The new owner has the same 21 day requirement as the previous owner.

4. Assignment and Subleasing Provisions. A sublease is a transfer of the entire leasehold estate to another person called a sublessee. The tenant may, if there is no provision to the contrary, assign or sublease the property to another. If a sublease is done, the original tenant leases/rents the property to another. It is usually referred to as a “sandwich lease.” The original tenant is still responsible for the original lease and the new tenant is leasing/renting the property from the original tenant. The secondary tenant is responsible to the original tenant and the original tenant is responsible to the landlord. An example would be: Home builder John leases a large parcel of land from the owner. He, the builder, becomes the tenant/lessee. John then builds a group of homes on the property. He sells the homes to buyers. The buyers own the home and lease the property from John. They become sublessees to John for the property and own their homes. At the end of the lease the property reverts to the original owner of the land and the owners of the homes have a problem. They own their buildings, but have no rights to the land. At this point there must be something done. Does John renew the lease with the landowner? Do the homeowners lease the land from the landowner? Does the landowner sell the property to the homeowners? Do the homeowners abandon their homes? Do the homeowners remove their homes? Something has to be done as the homeowners are sublessees and have no rights to the land upon expiration of the original lease between John and the landowner. When a developer builds apartments on leased land and then leases out the units individually he or she has a sandwich Lease. It does not have to be homes; it can be any type of property. Commercial stores use leased land quite often. Many of the major grocery stores own their buildings and have a long-term lease for the land. They also lease their buildings to other stores and continue with the land lease for the property. The tenant of the store pays rent for the building and the original store owner pays rent to the landowner for the land. These are both examples of sublease situation. Tenants can do the same thing. A tenant rents an apartment and then rents it to another party. The original tenant pays rent to the building owner and the sublessee pays rent to the original tenant.

If a tenant wants to be relieved of all responsibility for the lease, he or she must ASSIGN the lease to another with the landlord’s permission. The new tenant and landlord will create a Novation agreement where the new tenant assumes all responsibility for the lease and the original tenant is totally released from any obligations. This is referred to as an ASSIGNMENT of the lease. If the lease is not assigned, the original tenancy remains in effect and a sublease situation exists.