What Is a Defeasance Clause?

A defeasance clause is a provision in some mortgage contracts indicating that the borrower will receive the title to the property once all of the mortgage payments have been made. Not every state requires a defeasance clause. Depending on the state laws, a defeasance clause will be included in the mortgage contract, or🐠 the lender may place a lien on the property instead.

How a Defeasance Clause Works in Real Estate

In a typical mortgage loan, the home or other property serves as collateral. That allows the mortgage lender to recoup its money if the borrower defaults on the loan.

States differ in how that process works. In states that follow “lien theory,” the borrower holds title to the property, but the lender holds a 澳洲幸运5官方开奖结果体彩网:lien on the property and can 澳洲幸运5官方开奖结果体彩网:foreclose on it if the borrower defaults. In states that follow what’s known as “intermediate theory,” the borrower also holds title to the property, but the title reverts to the lender in the event of a default.

The remaining states follow “title theory,” in which the lender retains the title to the property until the mortgage is paid off. In states where the lender still holds the title, the mortgage contract is likely to contain a defeasance clause. Defeasance clauses are based on the concept of 澳洲幸运5官方开奖结果体彩网:defeasance, which nullifies a deed or contract.

The states that subscribe to title theory are Alaska, Arizona, California, Colorado, Georgia, Idaho, Mississippi, Missouri, Nebraska, Nevada, North Carolina, Oregon, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming as well as Washington, D.C.

Ultimately, defeasance occurs when the bo༒rrower finishes making all of the p🌃ayments on the loan and no longer owes anything to the lender.

Alternative Uses for a Defeasance Clause

In some situations, defeasance clauses may also be used to transfer alternative collateral. Specifically, the borrower could provide other assets to replace the real estate as collateral at some point during the loan.

This type of defeasance clause could make it possible for the borrower to obtain ownership of the property’s title before the end of the loan by supplying sufficient alternative collateral. The alternative collateral could include investment assets or other property.

Defeasance Clause Exceptions

As mentioned earlier, states that follow title theory allow a lender to hold title to a property until the mortgage has been fully paid off. At that point, the lender can release the deed to the borrower as prescribed in the mortgage contract’s defeasance clause. Currently, 20 states plus the District of Col♐umbia, listed above, follow title theory.

The r🍌emaining 30 states are exceptions. In those states, mortgage contracts simply end when all payments have been made and will not include a defeasance clause.

The Bottom Line

A defeasance clause is simply part of a mortgage contract. It states that the property title will transfer to the buyer once they've paid the mortgage in full. This means the home is used as collateral until the loan is paid off.