Definition:
An after acquired clause is a provision often included in mortgage agreements that allows the lender to include any property acquired by the borrower at a later date as additional security for the existing loan. This clause functions to ensure that any new property, investments, or acquisitions made by the borrower automatically become collateral under the pre-existing mortgage agreement.
Key Points:
- Protects the lender by expanding the security base.
- Potentially complicates refinancing or obtaining additional mortgages.
- Applies to physical property acquired after the initial loan.
Examples:
- Retail Expansion: A retail business mortgaged its initial store and later purchases adjacent property to expand. The after acquired clause renders the new acquisition part of the original mortgage’s collateral.
- Residential Property: An individual mortgages their home and later buys adjoining vacant land for garden expansion. The after acquired clause adds the vacant land to the existing mortgage’s collateral base automatically.
Frequently Asked Questions (FAQs):
Q1: What is the primary purpose of an after acquired clause?
A1: The primary purpose is to provide additional security for the lender by automatically including any properties acquired by the borrower post the initial mortgage agreement as collateral.
Q2: Can a borrower contest an after acquired clause?
A2: Yes, a borrower can negotiate the terms before signing the loan agreement. However, once accepted, contesting or altering the clause post-agreement can be legally challenging.
Q3: How does an after acquired clause affect additional financing?
A3: It can complicate acquiring new financing or mortgages because the new property is already tied to an existing mortgage, rendering it challenging to use as sole collateral for subsequent loans.
Q4: Is an after acquired clause standard in mortgage agreements?
A4: While commonly seen in commercial loans, it’s not standard for all mortgages. Borrowers should review their mortgage contracts to understand any clauses included.
1. Mortgage:
A legal agreement by which a bank, creditor, or lender lends money at interest in exchange for taking the title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.
2. Property Acquisition:
The process of obtaining ownership, control, or interest in a property, often involving negotiation, purchase agreement, and completion of the purchase.
3. Collateral:
An asset that a borrower offers to a lender to secure a loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup losses.
4. Refinancing:
The process of replacing an existing loan with a new loan, typically with better terms or interest rates, which can involve evaluating the total value of the collateral.
Online Resources:
- Investopedia: Comprehensive resources about mortgages and related clauses.
- Nolo: Legal articles and guidance regarding mortgage clauses and real estate transactions.
- Mortgage101: Practical advice and tools for understanding mortgage terms and conditions.
References:
- Investopedia: An in-depth look at mortgage securities and related clauses.
- Nolo’s Guide to Real Estate Law: Comprehensive guidance on buying, financing, and managing property.
Suggested Books:
- Mortgage Management for Dummies by Eric Tyson
- The Real Estate Wholesaling Bible by Than Merrill
- Legal Aspects of Real Estate by William H. Pivar, Robert J. Bruss
- The Book on Managing Rental Properties by Brandon Turner and Heather Turner
Real Estate Basics: After Acquired Clause Fundamentals Quiz
### An after acquired clause affects which part of the mortgage agreement?
- [x] The collateral securing the loan
- [ ] The interest rate of the loan
- [ ] The monthly payment schedule
- [ ] The lending institution
> **Explanation:** The after acquired clause specifically deals with the collateral securing the loan, adding any new property acquired by the borrower into the existing mortgage collateral.
### Why might a lender include an after acquired clause in a mortgage agreement?
- [x] To expand the security base with future property acquisitions
- [ ] To increase the interest rate over time
- [ ] To limit the borrower's purchasing power
- [ ] To streamline monthly payments
> **Explanation:** Lenders include an after acquired clause to expand the security base by automatically including future property acquisitions as additional collateral, thus ensuring their risk is minimized.
### What type of properties does an after acquired clause typically affect?
- [ ] Properties sold by the borrower
- [x] Properties purchased after the initial loan agreement
- [ ] Properties not related to the borrower
- [ ] Only commercial properties
> **Explanation:** An after acquired clause typically affects properties purchased by the borrower after the initial loan agreement, effectively pulling them into the original mortgage's collateral.
### How can an after acquired clause affect future refinancing options?
- [x] It can make refinancing more complicated
- [ ] It simplifies refinancing options
- [ ] It reduces interest rates for future loans
- [ ] It has no effect on refinancing
> **Explanation:** The inclusion of after acquired properties as part of the existing collateral may make refinancing more complicated, as these properties cannot be used as new collateral for additional loans.
### What must a borrower do if they want to exclude an after acquired clause in their mortgage agreement?
- [x] Negotiate the terms before signing the agreement
- [ ] Sign the agreement without reading it
- [ ] Review and sign sale documents instead
- [ ] Increase the loan amount
> **Explanation:** To exclude an after acquired clause or modify its terms, a borrower must negotiate with the lender before signing the mortgage agreement.
### Who primarily benefits from an after acquired clause?
- [ ] The borrower
- [ ] The real estate agent
- [x] The lender
- [ ] The property manager
> **Explanation:** The lender primarily benefits from an after acquired clause as it expands the collateral base, providing more security for their loan.
### Can an after acquired clause include non-real estate property as collateral?
- [ ] Yes, it includes all types of property.
- [x] No, it generally pertains to real estate property.
- [ ] Yes, with specific provisions.
- [ ] No, only excluding vacant land.
> **Explanation:** An after acquired clause typically pertains to real estate property, not including non-real estate assets unless otherwise specified within the contract.
### After acquiring new property, when does it generally become collateral if an after acquired clause exists?
- [x] Immediately upon purchase
- [ ] After a five-year period
- [ ] When the mortgage is fully paid
- [ ] Once the lender is notified
> **Explanation:** New property generally becomes additional collateral immediately upon purchase if an after acquired clause is part of the mortgage agreement.
### What issue might a business face with an after acquired clause during expansion?
- [ ] Decrease in property value
- [x] Complicating future financing options
- [ ] Higher property taxes
- [ ] Increased maintenance costs
> **Explanation:** A business might face complications in acquiring future financing for expansion as new properties are automatically added to the collateral securing the existing mortgage due to the after acquired clause.
### How can a business strategically handle after acquired clauses when planning growth?
- [x] Review and negotiate mortgage terms carefully before agreeing
- [ ] Avoid acquiring any new property
- [ ] Ignore the clause during business expansion
- [ ] Take out multiple small mortgages
> **Explanation:** To strategically handle after acquired clauses during growth planning, a business should carefully review and negotiate their mortgage terms before agreeing, understanding the future implications of such clauses.
