Mortgage Clauses and Covenants

When a home loan borrower closes on a new mortgage loan, included in the documents that have to be executed is the mortgage document.  The mortgage is the security instrument that pledges the property as collateral for the loan.  The mortgage secures your promise that the money borrowed will be repaid. 

The terms mortgage and loan are often used interchangeably.  But, to be precise the mortgage is actually a lien on the property which secures the loan.  The terms of the loan such as the mortgage rate, term and monthly payment are set out on the note not the mortgage.  Conditions of default and the terms regarding the security of the property are established in the mortgage document.

The mortgage will include various clauses and terms that protect the mortgage lender as well as the home loan borrower.  Examples of the various clauses and covenants that may be included in a mortgage or deed of trust may include:

The mortgage is dated and contains the names of mortgagor and mortgagee.  If the deed of trust from is used, the borrowers name appears, identified as trustor, grantor, or mortgagor.  The name of the trustee or grantee and the name of the mortgage lender, who is both the trust beneficiary and the note holder also appear.

The note executed by the borrower is reproduced in the mortgage or deed of trust.  The note includes an acceleration clause allowing the mortgage lender to declare the entire home loan balance remaining immediately due and payable if the borrower is in default.

The note may provide that the borrower is permitted to pay off the loan any time prior expiration of the full mortgage term without incurring a financial penalty for the early payoff, or it may provide for a penalty to be imposed on the borrower (prepayment penalty) if the debt is satisfied prior to expiration of the full term.  FHA, VA and conforming fixed rate loans do not have a prepayment penalties. 

The mortgage requires the borrower to pay all real property taxes and assessments on a timely basis, keep the building in a proper state of repair and preservation, and protect the building against loss by fire or other casualty by an insurance policy written in an amount at least 80 percent of the value of the structures.  Many mortgage lenders may also require insurance for 100 percent of the loan value minus the lot value.

The mortgage contains a defeasance clause giving the borrower the right to defeat and remove the lien by paying the loan indebtedness in full.

The mortgage provides the right of foreclosure to the mortgage lender if the borrower fails to make payments as scheduled or fails to fulfill other obligations as set forth in the mortgage.

In the deed of trust form, a clause gives the mortgage lender irrevocable power to appoint a substitute trustee or trustees without notice and without specifying any reason, by recording and instrument of appointment on the public record where the deed of trust is recorded.

In both the mortgage form and the deed of trust form, a covenant always specifies that the mortgagor has a good and marketable title to the property pledged to secure payment of the note.

The mortgage or deed of trust may contain an alienation or due on sale clause entitling the lender to declare the principal balance immediately due and payable if the borrower sells the property during the mortgage term and making the mortgage unassumable without the mortgage lenders permission.  Permission to assume the mortgage at a mortgage rate prevailing at the time of assumption can be given at the mortgage lenders discretion.  The alienation clause may provide for release of the original borrowers from liability if an assumption is permitted.  This release is sometimes referred to as a novation.

The mortgage or deed of trust always provides for execution by the borrower.  The mortgage or deed of trust provides for acknowledgment by the borrower to make the document eligible for recording on the public record for the mortgage lenders protection.