How To Avoid The Due On Sale Clause With Subject To Deals
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If you are an investor working with SubTo deals here's what to know...
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What is the due on-sale clause?
A due on-sale clause is a clause in a loan or promissory note that stipulates that the full balance of the loan may be called due upon the sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance. It allows acceleration if the borrower sells or transfers the real property if the mortgage has not been paid in full. These clauses are intended to protect the lender's security interest in the mortgage.
What does a due on-sale clause do?
A due-on-sale clause is a mortgage contract provision enabling a lender to demand the borrower repay the remaining mortgage balance in full if the property is sold or transferred.
In most real estate transactions, a buyer obtains a new mortgage to pay the seller for the house, and the seller uses these proceeds to pay off the remaining balance of their mortgage, taking any excess amount as profit. This essentially forces the seller to pay off their debt before formally transferring the title of the home.
When the loan terms include a due-on-sale clause, the mortgage is not assumable by the home’s buyer. The transaction plays out this way to ensure that a buyer gets a new mortgage at a more current interest rate, with current terms, and a seller can’t sell a home without the bank’s consent.
What are other names for the due on-sale clause?
Due on-sale clauses also called alienation clauses are a type of acceleration clause. Similar to due-on-sale clauses, acceleration clauses allow your mortgage lender to demand full repayment of your home loan.
When did the due on-sale clause begin?
Banks began inserting “due-on-sale” clauses in their mortgages in the 1970s when interest rates rose dramatically. Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower.
When does the due-on-sale clause apply?
Mortgages are a type of encumbrance or lien, which means that lenders get automatically notified when a property title is transferred. This triggers the due-on-sale clause, allowing the lender to demand immediate repayment of the remaining mortgage balance. (Basically, you can’t sneak a sale past the lender.) Ultimately, it’s a lender’s decision if and when to invoke the due-on-sale clause. If you’re compliant with paying your loan and selling your property in a traditional, legal way, you won’t need to worry about the clause.
What triggers the due-on-sale clause for a mortgage?
A due-on-sale clause is a requirement in a mortgage or other loan agreement that the loan be paid in full if the house or asset is resold. These provisions can be triggered either by an entire sale or partial sale of the debtee's interest in the asset.
4 Reasons a lender invokes a due-on-sale clause
You try to sell someone a property that you don’t own outright.
The lender finds out that you attempted to transfer the property to a new buyer without approval.
The lender fears an unvetted buyer would put the loan at risk.
The lender believes they can make more money if the new buyer were to apply for a new mortgage.
Do all loans have a due-on-sale clause?
Key Takeaways. Most mortgages have a due-on-sale clause, which gives the lender the right to ask for payment in full if the owner sells the home without paying the loan off. Unless prohibited by federal law, the lender can call in the loan any time it feels that it is in it's best interest to do so.
Legal exceptions to the due-on-sale clause
Several legal exceptions negate a lender’s right to demand the full mortgage payment.
1) You’re transferring the property during the divorce
Homeowners can transfer property to a spouse or child of a marriage if they file for divorce or legal separation, usually without having to repay the entire mortgage as a result. The new owner of the house, like your ex-spouse for example, must occupy the property as their residence to ensure the lender doesn’t trigger the due-on-sale clause.
2) You receive the property as an inheritance
Mortgage lenders cannot demand that beneficiaries repay the remaining mortgage balance on an inherited property if they plan to live in it. However, if you don’t plan to live there, mortgage assumption might be ruled out and you may have to repay the loan. Speak to a loan officer to find out more.
3) You’re moving the property into a living trust
When you put your home in a trust, you retitle the property so the trust becomes the owner. This is a common estate planning strategy that can make for a more seamless transfer of assets after your death, and the mortgage lender doesn't usually call for the mortgage to be repaid at this time. You can speak to an estate lawyer if you're interested in opening a living (inter vivos) trust.
4) You own the home jointly with someone else
Many borrowers enter joint tenancy agreements with spouses or partners when buying a home When one of the parties dies the surviving owner, the joint tenant, automatically assumes the mortgage and the lender won’t trigger the due-on-sale clause.
Buyers Dealing with High-Interest Rates!
With some mortgage interest rates as high as 7% many buyers are looking for better options. As a real estate investor using creative financing and working with SubTo deals you can help them. The market for rental properties will increase because fewer people can qualify for mortgages. That opens the door to even more opportunities for investors acquiring properties through SubTo.
Click the link below to get the paperwork to overcome several SubTo deal obstacles including the due-on-sale clause:
