If you want to sell your property or want to transfer to someone else, bear in mind that you must pay off your mortgage loan in full. Your decision will come down to what you initially agreed on your mortgage contract. There are a few legal exceptions to the due on sale clause mortgage clearly explained in this article that can be of assistance. Also, we will cover due on sale clause as it relates to a land trust, insurance, and transfer to LLC, which can be helpful in avoidance and protection purposes. Read further for more understanding.
What Is a Due-On-Sale Clause?
A due-on-sale is a provision in a mortgage contract, that states that if you sell or transfer your home to someone else, you must pay off your mortgage in full. When someone buys your home, you typically use their payment to pay off your remaining mortgage balance, then pocket any profits.
Due-on-sale clauses cover the lender from someone who’s doubtful to repay the mortgage by taking on the dealer’s loan. It also enables lenders when rates are high rather than thinking of a mortgage with a low-interest rate. The buyer would apply for a mortgage with an advanced rate and the lender would make further moneybags.
The due-on-sale clause eventually protects the lender from below-market interest rates. By asking for the full mortgage amount at the sale, the lender gets a full return on their investment. The new buyer of the home will have to take a new mortgage with a unique interest rate, based on today’s market interest rates.
The contrary of a due-on-sale clause is an ‘assumable mortgage. This means the new buyers can take on the terms of the mortgage kept by the current owners. If you ‘assume,’ or take on, someone’s mortgage, it means you’re agreeing to take on their debt and continue paying where the previous homeowner left off.
Assumable mortgages are desirable when the terms currently available to a buyer are less attractive than those previously given to the seller. The due-on-sale clause, also known as an acceleration clause, appears in almost all loans.
How Due-On-Sale Clause Works?
Typically, when you purchase a property, you will obtain a new mortgage to pay the seller for the house. However, the seller will use those proceeds to pay off the remaining balance of their mortgage. This common practice exists in part because of due-on-sale clauses.
If the mortgage contract includes a due-on-sale, you can ask the lender whether you can get around the clause. Sometimes the lender will still approve a mortgage transfer when it would benefit the company. For example, if circumstances lead the lender to believe that you might not be able to repay the mortgage, it may approve you to transfer the mortgage to someone else.
Don’t try to go behind the lender’s back and transfer a mortgage if prohibited in the contract. The lender will receive a notification of mortgage transfer to a new person, and it permits foreclosure on that home.
The due-on-sale is general in recent mortgages. However, it’s up to the lender to specify whether the situation calls for the summoning of the clause. The lender is likely to do so if they feel their security is at risk in the hands of an unvetted buyer. Or they believe they can make more money if the buyer applies for a new loan. However, the lender may be less likely to force the borrower to immediately pay off the mortgage in full. If the market is weak, they will not be able to recoup their costs by foreclosing the property.
Are There Exceptions to a Due-On-Sale Clause?
Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations. However, when the ownership of the mortgaged property changes it still can’t be enforced.
If you truly sign a due on sale clause as part of your mortgage contract there are a few legal exceptions that wouldn’t require a borrower to pay off the mortgage balance at the sale. These exceptions include:
#1. Divorce or Legal Separation
Exceptions could be If the borrower files for divorce or legal separation. The property may be transferred to the spouse or child of the marriage without invoking the due-on-sale. However, the new owner must occupy the property for this to be the case.
#2. Inheritance
If the borrower dies and a relative inherits the home, you can’t force the relative to pay off the remaining mortgage balance. However, if they choose not to occupy the home, the transferred title can trigger the due-on-sale clause. Exceptions to the due-on-sale clause are applicable to the possibility that the borrower transfers the property to a child.
#3. Living Trusts
In transferring property into a living trust, as long as the borrower continues to occupy the property and remains the beneficiary of the trust, the lender cannot force the borrower to pay off the mortgage on demand.
#4. Tenancy
If the borrower entered a joint tenancy agreement when purchasing the house, a lender can’t enforce the due-on-sale clause in the event that the borrower dies. Instead, the surviving joint tenant automatically assumes the entire mortgage and can pay it off as initially planned.
Note: these exceptions to the due-on-sale clause only apply when the spouse, child, inheritor, or beneficiary in question chooses to live on the property. If they choose to rent or sell the home, the due-on-sale clause would kick right back in. When in doubt, contact the lender to ask about your options.
Due on Sale Clause Transfer to LLC
Due to the sale clause transfer to LLC is subject to a mortgage title. The transfer of assets to LLC is for protection purposes raising the issue of the due on sale clause. Clients are often afraid that their asset protection transfer to LLC will cause their mortgage lender to call due on the sale clause on the note and mortgage. This is because the mortgage document states that the note is due any time they change the property title.
When an owner changes title to the property to a new entity owned by the same owner where the owner remains liable on the note and there is no diminution in the value of the loan security, there is no additional risk or harm to the lender. In such cases, a due on sale amounts to a sticking contract and arguably a restraint on trade.
The only way a lender could detect a change in property ownership to the client’s own LLC would be if the lender saw the change on the real estate tax records. Again, practically, lenders rarely investigate these documents so long as the loan is performing.
Land Trust Due on Sale Clause
There is an old claim that a land trust can be used as a means of avoiding the due on sale clause. This could be in the mortgage a borrower gives to a lender. Using a land trust and LLC may be a good choice for landlords and investors to avoid the due on sale clause. Although there are always exceptions to these general rules. Land trust alone as a means of limiting your liability and protecting your assets is never a good option. This is because it simply does not work for Indians. In short, land trusts are overvalued as a business and asset protection planning tool. However, it should be limited in its use to provide limited anonymity.
Due-on-Sale Clause in a Mortgage or Trust Deed
A due-on-sale clause is a clause in some deeds of trust. Giving the mortgagee the right to declare an acceleration of the mortgage debt if you sell the property without the mortgagee’s written consent. Most mortgages have a due-on-sale clause. Hence, it 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 its best interest to do so.
Some reasons lenders are prohibited from calling a loan in is if it is transferred because of the borrower’s death or a court settlement.
Due-on-the Sale Clause Insurance
Due-on the sale clause insurance can be a little confusing as many people think it doesn’t exist. However, it’s an insurance company that would provide you with due on sales clause protection policy. As many would say that there is no insurance company that offers this type of product. Some websites called it assurance which is more like a deed warranty. Therefore, if you are paying the loan on time there is no need to find someone to finance the deal if the loan is called.
Considering equity insurance/assurance will depend on your type of due on sale clause. It’s actually an insurance company that can help you with almost any dealing. However, it will give you and your seller peace of mind concerning the due on sale clause.
If the due on sale clause gets called, the insurance company will employ its resources in one of three ways:
- Contact the lending association and ask about the passion of the lender to enforce the provision if the payments, insurance, and taxes are current.
- Employ its capital pool and investor pool to buy the mortgage and have it assigned to Equity Assurance whereas the terms will remain the same.
- Equity can offer outstanding mortgages and notes on the secondary market.
Conclusion
Due-on-sale clauses are designed to save lenders from losing money in the event that a homeowner ruins their payments. This clause keeps homeowners from transmitting their debt to an unknown buyer who may default on their payments. Rather, homeowners must use the proceeds from the sale of their home to repay the debt to the lender. Also, the buyer must take out another home loan to pay for their mortgage. Borrowers make use of ancient claims that a land trust can be used as a means of bypassing the due on sale clause.
If you need a mortgage to purchase a property, chances are that your agreement will contain a due-on sale. Therefore, it’s crucial that you understand this provision before you sign your loan documents.
The due-on-sale protects your lender by discouraging prospective buyers from assuming your mortgage. Remember, if you try to sell or transfer the title of your belongings, you will be forced to instantly pay off the remaining balance of your mortgage with the proceeds from your sale. There are a few legal exceptions that wouldn’t require a borrower to pay off the mortgage balance at the sale.
Where the loan amount is enormous most banks will grant permission in advance of a title transfer for planning purposes. The best plan is to buy investment property in the name of an LLC or partnership so succeeding title transfers are unnecessary.
Due-On-Sale FAQs
Do all mortgages have a due-on-sale clause?
Most, but not all, mortgages have a due-on-sale clause. Some types of mortgages are assumable, like VA, FHA, and USDA loans.
Is a due-on-sale clause enforceable?
It’s unenforceable if the title is transferred to an heir or the property is transferred in the event of a divorce, or if the property.
What is a power of sale clause?
Most deeds of trust mortgages include a power-of-sale clause. This clause permits the trustees in the deed of trust mortgages to do non-judicial foreclosures on outstanding borrowers that is, foreclosing without going to court.
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