Embedded in paragraph 17 of most mortgages, is the dreaded due-on-sale-clause. It is likely to be the most feared topic in real estate investment circles. That is due in part to the lack of information available on the subject. The term "due-on-sale" means a provision in a contract authorizing a lender, at its option, to demand full repayment of a mortgage in the event that the real property securing the loan is transferred or sold to another party or the borrower neglects to make payments. A due on sale clause is also referred to as an acceleration clause. United States Code §1701-j of Federal Law, places some restrictions on the lender's right to enforce a due-on-sale provision.
During the 1970's, banks and lending institutions were lending money at a higher rate than in previous years thus prompting savvy borrowers to seek an alternative method of acquiring property. The borrowers began assuming existing lower interest mortgages rather than creating new mortgages, creating competition for the lending institutions. Thus, the due-on-sale clause was born. After much ado, consumers fought the lending institutions and the DOS clause was deemed an "unfair trade practice" by the courts.
Banks lobbied congress to pass a Federal Law overturning the lower courts decision, and on October 15, 1982 the President of the United States signed the Garn-St. Germain Depository Institutions Act of 1982 into law, calling it, "the most important legislation for financial institutions in the last 50 years." Though the Garn St Germain Act allows the DOS clause to be triggered, it also places some restrictions on when banks may use it, which presents a major opportunity for the educated investor to profit.
According to (P.L. 97-320, 96 Stat. 1469; Section 341, (d)
(1-9), a lender may n o t exercise its option pursuant to a DOS clause if:
1. the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property;
2. the creation of a purchase money security interest for household appliances;
3. a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
4. the granting of a leasehold interest of three years or less not containing an option to purchase;
5. a transfer to a relative resulting from the death of a borrower;
6. a transfer where the spouse or children of the borrower become an owner of the property;
7. a transfer from the 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;
8. a transfer into inter vivos trust in which the borrower 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.
Investor's who have worked with me before know that I am no stranger to the transfer of properties into trust. In fact, this is a very powerful no money down technique. Of course, legal counsel should be sought before attempting this technique.
If you are interested in the buying or selling of investment property, give us a call to find out whether or not this technique will be a possibilty in your case.