Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Introduction Due on Sale Clause
If you are talking to a mortgage lender or broker about the residential investment property that you are planning to buy and looking to get a conventional loan, they are following the Freddie Mac and Fannie Mae guidelines to underwrite these loans.
For many years people have talked about that if you transfer your property that has a mortgage on it into an LLC.
The lender can accelerate and call the note due. In this post, we will understand what is due on sale clause.
What is the Due on Sale Clause?
The due on sale clause is almost every mortgage contract out there between the bank and the homeowner.
Most of the mortgages are between 15 to 30 years that the borrower would be paying to the lender until they pay off that property.
The due on sale clause states that if the person is buying a house and if they later decide to sell the house, the bank has the option to demand payment in full for the remaining balance of that loan.
This actually makes sense because that house was the collateral used in order to obtain this loan.
So if that person no longer owns that house anymore, then they no longer own the collateral on which the loan was based.
So the banks in order to cover their loss, want to have at least the option to demand payment in full and basically bail on that loan and close it out.
So technically banks have the option to demand the payment in full, it is extremely unlikely that they ever will.
If you are making the payments on time and ensuring your taxes and insurance are on track then the banks won’t even consider sending you the due-on-sale clause notice.
Due on Sale Clause Law Exceptions
Under the 1982 Garn-St. Germain Act, banks cannot apply the due-on-sale clause in specific circumstances, even after the property in question is sold and the ownership is changed.
In case of legal separation or divorce, the ownership of the house changes. The bank can’t apply the due on sale clause under such a situation.
The equivalent is valid if the proprietor moves the property to their heirs, in the event that a borrower is deceased and the property is moved to a family member, or the property is moved to a living trust and the borrower is the trust’s beneficiary.
Conclusion
Regardless of whether the bank is lawfully qualified to apply a due on sale clause real estate there can be circumstances in which it might choose not to.
For instance, in a weak real estate market, it very well may be invaluable for the bank to permit another purchaser to accept the old home loan instead of taking a chance with the first borrower will default on it.
Also, if the property has declined remarkably in its value, and selling the property would not cover the mortgage balance, the bank may avoid the due on sale clause.
