What is an After Acquired Clause?
An after acquired clause is a provision in a mortgage agreement that includes any property subsequently purchased by the borrower as additional security for the existing mortgage. This means that any new properties acquired by the borrower are automatically tied to the original mortgage loan as collateral.
Real-Life Example of an After Acquired Clause
Example: Imagine Sami owns a quaint local café that has been flourishing over the past few years. Her business is situated on a prime piece of real estate, which she mortgaged to obtain her initial business loan. As the café’s popularity increased, Sami decided to boost her business by purchasing the adjacent land, planning to expand her outdoor seating area. Since her original mortgage included an after acquired clause, the new parcel of land is automatically added as collateral under the terms of her existing mortgage agreement. This situation precludes Sami from securing a new first mortgage specifically tied to the new land, limiting her financing options for future expansions.
Why is the After Acquired Clause Important?
The clause benefits lenders by providing them with additional security, but it can be a double-edged sword for borrowers. It ensures that the value of the lender’s security increases with any new property acquisitions, reducing their risk. However, for borrowers, inclusion of this clause can restrict how they leverage newly acquired property and navigate refinancing options.
Key Considerations for Home Buyers and Investors
If you’re a home buyer or real estate investor, understanding the implications of an after acquired clause is crucial. When considering a mortgage, review the terms with your financial advisor or real estate lawyer to ensure you are aware of any restrictions and possible impacts on your investment strategy.
Frequently Asked Questions
1. How does an after acquired clause affect future property purchases?
An after acquired clause automatically includes newly acquired properties as additional security under the original mortgage. Thus, it could prevent or complicate obtaining new, separate financing for those properties.
2. Can you negotiate an after acquired clause out of a mortgage contract?
Depending on the lender and specific terms, some mortgage clauses may be negotiable prior to finalizing the agreement. It’s always prudent to discuss these terms thoroughly with your lender.
3. Are after acquired clauses common in all types of mortgages?
Not necessarily—these clauses are more common in commercial and investment property mortgages rather than owner-occupied home loans. Yet, they can appear in any type of mortgage contract where the lender seeks additional security.
Related Terms: mortgage loan, property security, real estate, home financing, secured loan.
