Due-on-Sale-Clause
by Unknown
A provision in a mortgage or deed of trust that allows the lender to demand
immediate payment of the balance of the mortgage if the mortgage holder sells
the home.
One trend in the mortgage industry has been the virtual disappearance of
assumable mortgages. This is unfortunate for homebuyers, since an assumable
mortgage allows them to retain a below-market interest rate and avoid many
closing costs, such as a credit check and appraisal. Except for certain FHA and
VA loans, almost all mortgages now contain a “due-on-sale” clause which require
that the mortgage be paid if there is a change in ownership.
Typical “due-on-sale” language states that, “the Lender may, at its option,
declare immediately due and payable all sums secured by the Mortgage upon the
sale or transfer, without the Lender’s prior written consent, of all or any part
of the Real Property, or any interest in the Real Property.” A reading of the
language shows that the term, “due-on-sale” is misleading. In fact, the mortgage
may be called in if there is any transfer of any interest in the real estate,
and not just a sale of the property.
Some examples may show how far reaching the “due-on-sale” clause can be. The
most obvious example is a land contract, also known as a Contract for Deed.
Since a Contract for Deed passes equitable title to a potential buyer, such a
contract is a violation of the “due-on-sale" clause, even though the seller
retains legal title. This entitles the Lender to call in their mortgage and
demand payment in full.
It is possible that even a long term Lease will allow the Lender to accelerate
their mortgage, especially if the Lease contains an option to purchase. There is
some case law indicating that any lease longer than three years will trigger the
“due-on-sale” clause. But any Lease that contains an option to purchase will be
sufficient to call in the loan if it contains an option to purchase the
property, regardless of the length of the Lease.
For tax and probate purposes, some people transfer their property into a Land
Trust, also know as a Living Trust. These Trusts do not trigger the
“due-on-sale” clause, if the current owners are also the sole beneficiaries of
the trust. However, if you transfer your home into a Land Trust with your
children as beneficiaries, the Lender may call in the loan. Also, the exemption
for Land Trust only applies to owner-occupied homes, and no investment property.
What if one spouse signs a Quit Claim Deed to remove their name from the Deed as
the result of a divorce settlement? This is certainly a transfer in ownership.
However, federal law prevents the Lender from demanding immediate repayment of
their loan simply because two joint co-signors get a divorce. However, the
spouse who signs the Quit Claim Deed still remains liable on the Mortgage, even
though their name is no longer on the Deed.
Lenders are entitled to know to whom they are loaning money, and to set terms
and conditions. Moreover, the “due-on-sale” clause is now required by various
federal agencies. While such a clause may hinder some real estate deals, they
makes solid business sense.
Due On Sale Clause is on almost every mortgage note.
According to Title 12 of the US Code 1701-j-3, a federally enacted law (the
Garn-St. Germain Act, aka: the Federal Depository Regulations Institutions Act
of 1982), there is no due-on-sale violation when a property is placed into a
legitimate inter-vivos trust by a borrower who is a natural person, so long as
the borrower is, and remains, a beneficiary of the trust; so long as the trust
is revocable and does not confer occupancy rights to another.