In certain states, a defeasance clause is a required contract provision that ensures that the title for the property is transferred to the buyer once the mortgage is fully paid off.
A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.
What is the Defeasance Clause?
Definition: The defeasance clause is a required contract provision that ensures that the title for the property is transferred to the buyer once the mortgage is fully paid off.
In other words, the defeasance clause is a provision in a mortgage that will allow the homebuyer to redeem the full rights of a property upon the last payment to the mortgage lender. Basically, it’s the clause that specifies that the lender must surrender all rights to the property once the mortgage is paid. At this point, the buyer gets title to the property.
Now it’s worth noting this provision only exists in certain states. As we all know, real estate laws vary from state to state. Defeasance clauses exist in title theory states like California, Colorado, North Carolina, and lots more.
In title theory states, banks or mortgage lenders hold the title of a property until it is paid in full. In these states, the mortgage should contain a defeasance clause.
In lien theory states, however, banks or mortgage lenders never retain title to the property. Instead, the mortgage lender holds a lien against the property.
What to Know for the Real Estate Exam
What’s important to understand for the real estate exam is like other clauses, you need to remember what the defeasance clause is.
Remember, the defeasance clause is what ensures that the title for the property is transferred to the buyer once the mortgage is fully paid off.
A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.