The due-on-sale or acceleration clause is a provision in a mortgage document which gives the lender the right to demand payment of the remaining balance of the loan when the property is sold. A due on sale clause will generally read something like this:
If all or any part of the property herein is transferred without the lender's prior written consent, the lender may require all sums secured hereby immediately due and payable.
In relation to residential property consisting of four units or less, a United States federal law referred to as the Garn-St Germain Depository Institutions Act of 1982 gives these exceptions where the lender cannot enforce the due on sale clause:
- A lien or other encumbrance which does not relate to a transfer of rights of occupancy in the property
- A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
- The granting of a lease, not containing an option to purchase
- A transfer to a relative resulting from the death of a borrower
- A transfer where the spouse or children of the borrower become an owner of the property;
- A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
- A transfer into an inter-vivo 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
- Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
If I transfer title to a property that has a mortgage with a due on sale clause, is the mortgage automatically due in full?
The due on sale clause is a stipulation in a mortgage, similar to the other clauses in your mortgage. For example, if you miss a payment on the mortgage, the lender has the option to accelerate the mortgage and call the loan due if they choose to. The key words here are 'if' and 'option'. Here are some key points to consider:
•1. The lender has to find out about the transfer.
•2. The lender has the option or the right to call the loan due and payable in full - it is not automatic.
•3. If the lender does decide to enforce the due on sale clause you will be given notice according to your state's guidelines (similar to foreclosure proceedings)
•4. Typically, the lender will give you an opportunity to correct the default. Remedies include having the new owner payoff or refinance the loan or transferring the title back to the seller until the mortgage is paid off.
Is transferring the title without the lenders permission illegal?
No. It is a violation of the mortgage clause. Mortgage clauses are part of the agreement between you and your lender - they are not laws. Just like if you don't make your payments on time - you violate a mortgage clause.
I bought a property subject to a mortgage containing a due-on-sale clause without getting new financing to pay off that lender. What is the real danger to me as an investor?
If the lender finds out, they have the right to call the loan due and payable. If you cannot correct the default, the lender has the option of starting foreclosure proceedings to reclaim the property. In general, if you are making payments on time - lenders don't go looking for a reason to foreclose.
Can I get the owner to sign a deed to me and then just not record it?
This is not the best idea. Since the previous owner would be the only public owner of record, they could go out and mortgage the property or even sell it again! Further any new judgments, bankruptcy proceedings or other liens against the previous owner could affect the property. A deed is usually the best course for showing ownership but if necessary, you may consider showing your interest in the property through an inter-vivo trust or using a contract for deed or affidavit of interest.
How would a lender discover the title has been transferred?
Lenders don't typically conduct routine title searches. The most common way the lender finds out is if the loan goes into default, the lender will probably check the title and discover a transfer has taken place. Also, if the lender pays the insurance from your escrow account and you change the primary insured on the Homeowners Insurance they may notice that the insurance policy has a different name.
Are there any specific disclosure or mortgage fraud laws that require professionals to report a transfer?
From a legal standpoint, a real estate agent, attorney or closing agent is not usually legally responsible for contacting a lender and informing them that a transfer has taken place. However - many professionals will refuse to handle the sale unless the mortgage is satisfied or the lender agrees to the transfer.
How do we proceed if a traditional title agent/attorney will not handle the closing?
In most states, you have the option to get a deed, make it subject to the existing mortgage and execute that yourself (with the seller). Then just take it to the county courthouse and record it. If you must have a HUD-1, there are online sites where you can create one yourself. This is not the best way to buy/sell but people can and do handle legal issues on their own successfully. It is recommended before you 'close' a transaction on your own - you should contact a local real estate attorney and ask him/her if the state law permits two individuals to handle their own transaction and execute and record the deed.
Are there any other difficulties to be aware of when purchasing or selling subject to a due on sale clause?
- You may not be able to get typical protections such as title insurance
- It may be more difficult to close the sale through a traditional agent.
- Usually, the seller maintains the insurance on the property and the buyer is typically added to the insurance as an ‘additional insured' which means if there are any claims - the insurance check will be issued to the seller. Be sure the contract clearly states how any insurance proceeds will be handled.
If you sell your property subject to a mortgage with a due on sale clause - be sure that you clearly disclose this fact in the contract and in the deed. The deed should specifically state the title is being taken subject to the existing mortgage, and its terms. Be sure to reference when and where the mortgage was recorded.
In most cases, lenders today are fairly reasonable when it comes to violations of due-on-sale clauses on performing loans. Unless the violation is specifically brought to their attention, there is no financial incentive for a lender to enforce a due-on-sale clause on a performing loan especially if the current market interest rates aren't much higher. A lender does not want to add defaulted loans to its portfolio.
Regardless, it is wise to be prepared for the worst case possibility. If you buy a property subject to a mortgage with a due on sale clause, be prepared to pay off or refinance the loan in the event the lender does exercise their right to enforce the due on sale clause or be prepared to transfer the title back to the seller and make other arrangements that will satisfy the lenders requirements.
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