Unusual mortgage clauses you may be asked to agree to.

Right of first refusal

You may be asked to have a clause in the mortgage that looks something like this, "That this mortgage shall not be sold or assigned without the prior written agreement of the Borrower. Borrower shall have the right to pay off this mortgage on the same terms and conditions of the proposed sale or assignment."

What this means is that the borrower can stop you from selling your valuable asset. And note buyers will not be willing to invest time investigating and bidding on your note, as they will know that the borrower may well end up getting the benefit of their negotiating.

NEVER agree to this clause. If you are asked to sign it just say, "No that's not acceptable to me. But I will agree verbally that I have no objection in principle to letting you bid on the mortgage if ever I should choose to sell it." 

Of course, as a home BUYER, this is a great clause to have in your mortgage.

Substitution of Collateral

This clause looks something like this, "Borrower may, at any time, substitute for the collateral on this mortgage, a mortgage on another property of equal or greater value. And at that time the borrower shall provide a satisfaction of mortgage on this mortgage."

Let's see what this means. Assume that you can sell your house, worth say $100,000,  and take back a mortgage for $80,000. Usually, the mortgage must be paid off when the house is sold again or refinanced by the borrower (house buyer). What this means is that your mortgage can be shifted to another property, worth at least $100,000.

If the borrower has been paying on time and the interest rate is fair,  you may have no objection to this. But you should never be REQUIRED to agree to it.

On the other hand, as a home BUYER the above clause is to your advantage.

Our recommendation is to either strike this clause or add in front of it the words, "Lender may, but is not required to allow Borrower..."

As always, please note we are not attorneys, all states have different laws and we recommend you seek the advice of a qualified local professional.

The above clauses NEVER appear in the FannieMae mortgage forms we recommend.

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