Due on Sale Clause - And It's Meaning - Article
“DUE ON SALE”
The "due-on-sale" clause is probably the most, feared and
misunderstood topic in real estate. This article will break down
the due-on-sale clause and discuss why it is not the feared
animal most people make it out to be.
What is
the Due-on-Sale Clause?
This is
the exact clause taken from Form 3024 1/01 - MINNESOTA - Single
Family - Fannie Mae/Freddie Mac Uniform Instrument:
***18. Transfer of the Property or a Beneficial interest in
Borrower. As used in this Section 18, "Interest in the
Property" means any legal or beneficial interest in the
property, including, but not limited to, those beneficial
interests transferred in a bond for deed, contract for deed,
installment sales contract or escrow agreement, the intent of
which is the transfer of title by Borrower at a future date to
purchaser.
If all or any part of the Property or any Interest in the
Property is sold or transferred (or if Borrower is not a natural
person and a beneficial interest in Borrower is sold or
transferred) without Lender's prior written consent, Lender may
require immediate payment in full of all sums secured by this
Security Instrument. However, this option shall not be
exercised by Lender if such exercise is prohibited by Applicable
Law.
If Lender exercises this option, Lender shall give Borrower
notice of acceleration. This notice shall provide a period of
not less than 30 days from the date the notice is given in
accordance with Section 15 within which Borrower must pay all
sums secured by this Security Instrument. If Borrower fails to
pay these sums prior to the expiration of this period, Lender
may invoke any remedies permitted by its Security Instrument
without further notice or demand on Borrower.***
The due-on-sale (a.k.a "acceleration clause") gives the lender
the right to call the loan due. It does not say that the loan
must be called due, only that the lender has the option, if they
so choose.
Where
Did the Due-on-Sale Clause Come From?
Banks began inserting due-on-sale clauses in their mortgages in
the 1970s when interest rates rose dramatically. Homebuyers were
assuming existing loans rather than borrowing new money from
banks because the interest rates on existing loans were lower.
The banks realized that their old, lower interest loans were
their own, toughest competitor. The banking industry came up
with the "Due-on-Sale" Clause. It is a contractual agreement
only. It is not law.
This plan worked. The banks were able to force new home
purchasers to get a new loan (at the higher interest rates) and
pay off the lower interest rates when a property was sold or
transferred.
But... Today, interest rates keep dropping and the new loans are
at lower interest rates than the old ones. Could you see the
banks wanting to call these higher interest rate loans due, just
to make new ones at lower interest rate. I don't think so.
As long as the rates stay where they are, it doesn't make
financial sense for the banks to call these loans due. Even if
the rates are the same or just a little higher. You see, the
process to foreclose on a loan that is still in good standing,
just because the ownership transferred would be expensive. And,
if you live in a state with long redemption periods like
Minnesota, which has a 6-month redemption period after the
sheriff's sale, the process to foreclose would be long and
expensive for the banks. As long as the loan is current, and in
good standing with the bank, they would much rather keep taking
your payments.
Is it
Illegal to transfer ownership of property with the due-on-sale
clause?
Many people are under the mistaken impression that transferring
title to a property secured by a "due-on-sale" mortgage is
illegal. This is because most people have never read the
Due-on-sale clause. They just listen to what the Realtors® tell
them. I would venture to guess that most Realtors® have never
read the due-on-sale clause, or the Garn St. Germain Act. If the
lender discovers the transfer, it may at its option, call the
loan due and payable. If it cannot be paid, the lender has the
option of foreclosing.
Garn
St. Germain Act: (US Code / Title 12 - Banks and Banking /
Chapter 13 - National Housing / 1701j-3 Preemption of
due-on-sale prohibitions.
There are several exceptions in which the lender may not enforce
the due-on-sale: The one they are referring to is in section:
(d) Exemption of specified transfers or dispositions:
(8) a
transfer into an inter vivos trust in which the borrower is and
remains a beneficiary and which does not relate to a transfer of
rights of occupancy in the property; or
What is
a Land Trust?
A land
trust is a form of a revocable, living trust, which is exempted
under the Garn St. Germain Act. A land trust is a legal entity
for taking title to real property.
The trustee holds title for the benefit of the grantor (in this
case, the grantor is also the "beneficiary"). The act of placing
your property into a land trust does not trigger the due-on-sale
clause. However, transfer of the beneficial interest does.
How do
I buy a house “Subject-To” with the due-on-sale clause?
Let's say that you find a house in pre-foreclosure. The seller
is willing to give you title to his property if you stop the
foreclosure and save his credit. The only "glitch" is that the
loan is not assumable because the mortgage has a due-on-sale
clause. So you pass, right? Wrong…
The first thing you need to find out is all the facts the seller
has represented to you. Do your due diligence. Get a title
company or Attorney to do a Title search. This will tell you
the amount of the mortgage, if there is a second or a third
mortgage, and if there are any liens or judgments against the
property.
If you are satisfied with the title search, then you may proceed
with the transaction. Get the property under contract. Along
with the Purchase agreement, you will need to get an
“Authorization to release information” signed by the Sellers.
This is the only document that will allow the Lender to release
any information about this loan to you. If the loan has already
been turned over to the attorneys for foreclosure, then you will
also need this document for them.
You will need to request the loan balance, monthly payment,
amount of arrearage (if any) and amount to bring the loan
current. If the lender is willing to work with you at this
point, you have half the battle won. Most Lenders (and
attorneys) will work with you at this point. The most important
thing to them is bringing this loan current.
The banks get punished for having “non-performing assets” on
their books. For every $1.00 in bad debt on their books, they
are not allowed to lend back out $8.00. (Example: the bank has
to foreclose and take back a property with a $100,000 mortgage,
that means they are not allowed to lend out $800,000, until that
house is sold, and off their books.) That is why the banks are
usually willing to deal with us, even though they know the loan
will be taken subject-to the existing loan, which has a
due-on-sale clause in the mortgage.
Next, GET THE DEED!!! Once you have the deed, then you have
control of the property. Go ahead and make the back payments
and arrearages. You now own the property, and the loan is
current. If the bank is not going to take the payments from
you, then you also know at this point that they are calling the
loan due (which is rare, but does happen). At least you know,
you have not spent any money on this property, except for a few
dollars on a title search, and some of your time. But most of
the time, the lender will take your money. They will re-instate
the loan for you, and you own a property that you bought
subject-to, with an existing loan that you did not originate,
did not sign for, and has a “Due-On-Sale” clause in it.
As long
as the interest rates stay low, the “Due-on-sale” clause should
not be feared, only understood.
Go
ahead and try one yourself. If you have questions or need more
help, feel free to contact me at:
mike@bicoastalconsulting.com
Please
share your success stories with me, and our readers. The more
success you have, the more success we all have.
Prevent Fraud check the
Securities Fraud
Prevention Website Daily.
 |
Home Money Making $
