The mortgage document is a contract between you and your lender -- with your home hanging in the balance. It is important not only to read, but to understand the mortgage covenants. If you violate them, intentionally or not, the lender can declare the loan in default, leaving you out on the street.
Affirmative covenants are actions you promise to perform during the term of the loan. First and foremost, you agree to pay the loan. That’s a given. You will pay your taxes and keep the property in good condition. You will keep a current insurance policy in the amount of the loan naming the lender as mortgagee. If you own the property under a business, such as under an LLC, you will maintain operations or notify the lender when you stop. You will also let the lender know immediately of any judgments, liens or pending litigation. You will also provide updated financial information as requested, to show that you can still pay the loan.
The opposite end of the spectrum, negative covenants describe what you agree not to do. You will not sell or transfer ownership of the property without the bank’s knowledge and consent. If the bank inserts a negative borrowing pledge, you can’t get any other loans using your house as collateral. In the case of a business, you will not make any loans or advances to a person or business without consent. You also agree not to let your the ratio of your income to your debt payments fall below a certain level. In other words, you're agreeing not to borrow more than the lender is comfortable with.
Loan covenants, both affirmative and negative, are outlined in your loan documents, specifically the mortgage and loan agreement. Each type will be covered in its own section. For example, Section 3 will be “Affirmative Covenants.” Section 3.1 will be “Promise to Pay.” The text will detail the terms of payment under the loan. It will continue in this format in naming all the covenants. It is important to read and understand the covenants before signing the document. Once you sign, it is essentially written in stone and can’t be changed without approval from the lender.
If you violate a covenant, the lender informs you in writing. Depending on the severity and scope of the violation, it may even declare the loan in default. If you are in violation of a covenant, it is important to contact your loan officer immediately to work out a plan to cure the violation. For example, if you’ve become delinquent, you may need a temporary reduction or postponement in payments to bring the loan current. Whatever the case, be willing to work with the lender or you can end up out on the streets after it forecloses.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.