| The "Due On Sale Clause" is among the most | | | | things that some people consider legal and other |
| frequently misunderstood and most-feared legal terms | | | | people consider illegal. |
| in American contractual law. In this article, we are going | | | | In the 27 years since this legislation was passed, the |
| to take a look at what it is, what it is not, and how to | | | | federal government has not taken steps to clarify any |
| avoid violating it. | | | | of the ambiguity in the legislation. As a result, it is |
| What Is The Due On Sale Clause? | | | | entirely possible to find lawyers who argue for each |
| On nearly every home mortgage and loan contract | | | | side of the specific interpretation of the legislation. |
| written in the United States, the Due On Sale Clause is | | | | Although some elements of this legislation remain |
| one of those fine print inclusions that a lot of home | | | | ambiguous, some elements of the legislation are crystal |
| buyers overlook. | | | | clear. (As always, you should consult with an attorney |
| In essence, the Due On Sale Clause is a legal term | | | | before signing any contract.) |
| that means that if a mortgage holder transfers interest | | | | One point that is crystal clear is that any loan written |
| in a real property to a third-party, then the bank or | | | | on a manufactured home (mobile home) cannot include |
| other lender has the "right" to call the loan "due in full", | | | | a Due On Sale Clause. All loans made on a |
| and if the mortgage holder cannot pay the loan in full | | | | manufactured home may be assumed by a third-party. |
| at that time, the bank has the right to foreclose on the | | | | Vanderbilt Mortgage, one of the largest lenders on |
| property. | | | | manufactured homes, makes the process super easy. |
| It must be noted however that many banks and | | | | They will send you a credit application for your buyer, |
| lending institutions do not enforce their rights in | | | | and if the person passes credit check, that person can |
| association to the Due On Sale Clause. Banks and | | | | take over your home loan immediately under |
| lending institutions are "not required" to enforce the Due | | | | whatever terms you set. |
| On Sale Clause, but they have the "right" to do so at | | | | Another exception includes the ability to sign a lease of |
| their discretion. | | | | up to three years, so long as that lease does not |
| Understanding The Foreclosure Process | | | | include an Option To Buy. |
| This is an area that most consumers simply do not | | | | Allowances for an exception to the Due On Sale |
| understand. In fact, just ten years ago, even I believed | | | | Clause have been included to reflect the possibilities of |
| that if a home were foreclosed, the bank would hold | | | | the death of a borrower or a couple getting a divorce. |
| the property until they could sell it at its full retail value. | | | | One more important exception to the Due On Sale |
| But the truth is that banks and lending institutions | | | | Clause has to do with Inter Vivos Trusts. Also called a |
| generally do not make money when they foreclose a | | | | Living Trust, the Inter Vivos Trust is a legal instrument |
| property. Instead, most banks will lose tens of | | | | that permits the transfer of the ownership of the |
| thousands of dollars if they are forced to foreclose on | | | | property from the individual to a legal trust, managed |
| a property. | | | | by a trustee and held by the homeowner as |
| Here is the reason why. | | | | beneficiary. This was important to note, because many |
| When a bank forecloses a property, they cannot | | | | real estate investors use this as a tool to protect the |
| afford to have non-performing real estate on their | | | | interests of the buyer and seller in the real estate |
| books. Banks and lenders also borrow money and | | | | transaction. |
| have debts to service. So a piece of real estate on | | | | If you want to know all of the specifics of this |
| their books that is not generating an income is contrary | | | | legislation, please refer to the Cornell Law URL |
| to the lenders business model. | | | | included above. |
| As a result, when banks foreclose on a property, they | | | | The Due On Sale Protects The Lenders' Interests |
| need to sell that property quickly. Foreclosed | | | | Although banks and lending institutions have the "right" |
| properties are sent to a sheriff's sale, usually within 90 | | | | to enforce the Due On Sale Clause, most lending |
| days of the completion of the foreclosure process. | | | | institutions will not exercise that right. |
| Now, here is where we get into the dollars and cents | | | | Some of the ambiguity that accompanies the legislation |
| of why your lender is going to lose tens of thousands | | | | regarding the Due On Sale Clause is whether a |
| of dollars when they are forced to foreclose your | | | | borrower is required to notify his or her lender of a |
| property. The average property sold at a sheriff's | | | | transfer of interest in a property. While it is fraud and a |
| auction will only generate 20- to 40-cents return | | | | crime to mislead your lender, some argue that if you |
| against the retail value of the property! | | | | don't tell your lender, then you will have circumvented |
| So, if you have a 40% equity stake in your home at | | | | the legal ramifications of violating the Due On Sale |
| the time of foreclosure and your bank will only be able | | | | Clause. After all, if you don't lie to your lender, then you |
| to collect 20% to 40% of the homes' retail value at | | | | have not committed any fraud. |
| auction, your bank is still going to lose 20% to 40% of | | | | The people who take this approach also believe that if |
| the retail value of the property at auction. If your home | | | | the lender never figures it out, then nothing is lost if the |
| is worth $100,000, you will lose your 40% equity in the | | | | buyer continues to make all of his or her payments on |
| property or $40,000, and your bank will lose 20% to | | | | time every month. |
| 40% of the retail value of the property or $20,000 to | | | | Personally, I prefer that you play straight with your |
| $40,000 when they sell your home at auction. | | | | lender. As someone who buys homes that have a |
| When you begin to understand why a bank or lender | | | | mortgage, it is in my best interest also, if the lender is |
| would not want to foreclose your home, then you | | | | aware of our intent to do a transaction. I would hate to |
| begin to understand why a bank or lender may | | | | buy your house under contract, pay on that house for |
| choose not to exercise its rights under the Due On | | | | one payment or dozens, and then have your lender |
| Sale Clause. | | | | discover that you did not tell them that I was buying |
| The History Of The Due On Sale Clause | | | | your house. If your lender calls the Due On Sale |
| The Due On Sale Clause began to work its way into | | | | Clause after I have worked out a purchase deal with |
| mortgage contracts during the 1970's. Homeowners | | | | you, then that would be a pain in my you-know-what. |
| who took loans in the 1950's and 1960's were getting | | | | Some lenders will not hesitate to call the Due On Sale |
| really low interest rates on home loans. But, during the | | | | Clause, although most are happy so long as they |
| 1970's, interest rates began to spiral upwards. | | | | continue to receive on-time payments for the life of |
| Home sellers who were willing to entertain "creative | | | | the loan. |
| financing alternatives" to sell their homes began to sell | | | | That is why I suggest always to call your lender with a |
| their homes to other parties through Contract For | | | | "If I wanted to" scenario. Don't tell your lender "you did |
| Deed arrangements. This enabled buyers to avoid | | | | it". Tell your lender before you sign the paperwork "you |
| going to the bank to get new loans, which would | | | | would like to do it". |
| require a much higher interest rate than the rate the | | | | Test the waters with your lender before you venture |
| current homeowner was paying on the home. | | | | into the deal. Chances are that your lender will agree, |
| The math was easy to follow. The existing | | | | so long as the buyer knows that if the payments |
| homeowner was paying 2% to 4% interest on his or | | | | come late, that the bank may exercise its right to Due |
| her mortgage. Buyers getting new loans would be | | | | On Sale. |
| paying 8% to 16% to buy the same house. Assumable | | | | One More Note |
| mortgages were a clear winner for homebuyers, due | | | | Someone asked what a Demand Clause was and if it |
| to the higher interest rates on new loans, and they | | | | is similar to the Due On Sale Clause. It is similar, but |
| were a clear winner for home sellers who would be | | | | very different. The Demand Clause allows the lender |
| able to sell their homes more quickly to motivated | | | | to demand full payment at any time for any reason. |
| buyers. | | | | With the Due On Sale Clause, then full payment can |
| Banks viewed the Due On Sale Clause as a method | | | | only be required if the interest in the property changes |
| to force buyers into a higher interest rate. So banks | | | | hands. |
| began to include the Due On Sale Clause on all | | | | In Conclusion |
| mortgage contracts. | | | | Tens of thousands of deals are done every year, |
| Early on, a few states sided with buyers who felt that | | | | where the mortgage holder sets up a Contract For |
| the Due On Sale Clause was tantamount to predatory | | | | Deed deal with a buyer, and the lending institution |
| lending practices. So in the late-1970's and early-1980's, | | | | permits the transfer to happen unimpeded - even |
| state governments began to outlaw the Due On Sale | | | | though the lending institution has the right to stop the |
| Clause. | | | | transaction at any time under the terms of the Due On |
| However, the federal government sided with the | | | | Sale Clause. |
| banking and savings and loan industries and passed a | | | | If you want to sell your home during this housing crisis |
| law in 1982, The Garn-St. Germain Depository | | | | and credit crunch, your first best bet is to call your |
| Institutions Act of 1982, that made the Due On Sale | | | | lender and have a discussion about "If I wanted to sell |
| Clause legal in all fifty states - with a few exceptions | | | | my house through a Contract For Deed" scenario. |
| defined by the legislation: ( | | | | If your lender says that they would call the note, then |
| The Garn-St. Germain Depository Institutions Act of | | | | you know that this option is not for you. However, if |
| 1982 Exceptions | | | | they indicate that they would be happy to let you go |
| As with any document filled with legalese, the language | | | | through with such a deal on certain terms, then you will |
| can be somewhat confusing, leaving room for | | | | know that you have another option for getting out of |
| interpretation in the law. As a result, many real estate | | | | that house that you do not want anymore. |
| investors operate on the fringes of this legislation, doing | | | | |