A real estate licensee in Hawaii is showing a leasehold property in Nuuanu. The lease has 22 years remaining, and the monthly ground rent is $600. The buyer's lender informs them that obtaining conventional mortgage financing for a leasehold property with fewer than 30 years remaining on the lease will be very difficult. Which of the following best explains why the remaining lease term affects financing for this leasehold property?
Correct Answer
A) Lenders require the lease term to exceed the mortgage term to ensure the collateral will exist for the life of the loan
Lenders require the remaining lease term to exceed the mortgage loan term (typically by a margin) to ensure that the collateral — the leasehold interest — will continue to exist throughout the life of the loan. If the lease expires before the mortgage is paid off, the lender's collateral disappears, creating significant risk. With only 22 years remaining on the lease and a typical 30-year mortgage, lenders will generally decline to finance the purchase because the lease would expire before the mortgage matures.
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