What is a Defeasance Clause?

Published by Thomas Herold in Laws & Regulations

'Defeasance Clause' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A defeasance clause refers to a mortgage contract. It is the statement in a mortgage loan that explains what will happen once a borrower has repaid all of the outstanding loan amounts. At that point, the lender usually will be required by law to hand over the title of the property to the owner. These defeasance clauses are not utilized in every part of the country. Instead they are a part of mortgages where they are not issued on a lien basis. When such liens are used instead, lenders keep their interest in the house. This gives them the right and ability to foreclose on the property in case the borrower does not make the payments according to the loan terms and agreement.

When a loan contains a defeasance clause, borrowers should carefully read through it. They must be certain that the lender interest in the house will come to an end after the loan is fully paid off including principle, interest, and other costs. This is the standard and accepted practice in the industry.

As mortgages are set up using a defeasance clause, lenders keep a special form of title called a defeasible title. These conditional titles may be revoked in specific scenarios. It is the defeasance clause itself found in the mortgage contract that determines when the lender will give up the title to the property after the borrower has fulfilled all of the loan obligations. The clause may also detail additional information. This can include penalties for prepayment should the loan come with them.

After the home buyers have completely repaid their loan, they can redeem their property’s title. The one time borrower then becomes the home owner with title. Having the title is important for many reasons. It allows owners to refinance the home, sell it, rent it out, pledge it for a line of credit, or keep and live in it indefinitely. These titles are supposed to be free and clear after the interest of the lender terminates. An exception to this might be if the title had other issues hanging over it that had nothing to do with the mortgage loan with which the buyer purchased it. This might be from a tax lien or other problem.

It is the paperwork associated with the mortgage which usually spells out such things as defeasance clauses. Such paperwork should come with terms and conditions that are spelled out in great detail. For example, this contract contains all of the relevant information that pertains to the forecast repayment date, total amount to be paid back throughout the loan, and other issues. Buyers should carefully review all of this for accuracy. If any of it does not appear to be as expected by the borrowers, then they need to talk with the lender before signing any contracts.

There are several different ways that titles can be released by the lender. A defeasance clause may stipulate that the lender needs to release the title at once to the borrower after the loan has been completely paid. In other cases, the borrower might need to file paperwork for the release before the title comes back. The title should be cleared when the loan is paid off in full. Should any problems with this title arise, it can be a serious issue in the future when the owner wants to sell or refinance the house. Clearing up issues and mistakes on a title can take time, so these should be addressed as soon as possible.

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The term 'Defeasance Clause' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.