A Late Payment Penalty clauserequires the borrower to pay a penalty or late charge for any payments that are considered to be late. According to California law, Article 7, 10242.5, a late payment cannot exceed an amount equal to 10 percent of the principal and interest payment. In addition, a late charge cannot be assessed on any payment received within 10 days of the due date.
A Prepayment Penalty clause allows lenders to control prepayments by including a provision that allows the lender to assess a penalty to the borrower for paying early. In California, Article 7, 10242.6 of the Real Estate Law allows a prepayment penalty of up to six months’ interest on any amount of principal paid in excess of 20 percent of the loan amount in a 12-month period.
If there is not a prepayment penalty clause, a Prepayment Privilege clause allows the borrower to repay the balance of the loan at any time without being assessed a penalty.
A Lock-In clause is a very drastic form of a prepayment clause as it actually prohibits the borrower from paying the mortgage loan in full before a specific date.
A Due-On-Sale clause is a form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold.
A Subordination clause is an agreement to reduce the priority of an existing loan to a new loan that will be recorded in the future.
A Release clause is often used when two or more properties are pledged as collateral for a single loan, as developers often do. As the developer sells off each lot, a portion of the money from the sale is used to pay part of the mortgage. In return, the lender executes and records a release of the lot that was sold.
An Exculpatory clause is inserted in a financing document when the lender agrees to waive the right to a deficiency judgment.
In some circumstances, a buyer may purchase a property “subject to” the existing mortgage. In this situation, the buyer takes possession of the property, while the seller retains legal title until the buyer pays off the loan. The buyer is not liable to the lender for the payment of the note; however, if the seller defaults on the note, the buyer can lose all his or her equity in the property in a foreclosure sale.