I thought I would post
on a topic that has reared its head again lately – the notorious “due on sale”
clause (key terrifying music). Every few
years this will get talked about and so I thought it would be a good idea for
us to cover this right here and now.
In this post we’ll cover what the “due on sale” clause is,
I’ll even show you the actual verbiage from the clause itself, and then how you
can avoid it. Let’s get started.
What is the “Due on Sale” Clause?
The “due on sale” clause, as its commonly referred to, is 2
paragraphs that are usually located in Fannie Mae and Freddie Mac “notes”
(which is the specific form/instrument that outlines the terms of your
mortgage). These paragraphs give the
lender specific rights to call the loan due in full if the title ever
changes. For example, if you ever sold
the property. While the two paragraphs
in question don’t actually use the terms “due” or “sale” it’s been given that
name through the years to provide an easy way to explain the verbiage.
Normally, if there is a loan attached to the property that
loan is paid off when you sell it. The
cause for concern though is what if I don’t WANT to pay off that mortgage (like
in an owner financed scenario) or if I just change the title to my LLC after
closing - would the lender call my note due?
And the short answer is no…AS LONG AS YOU ARE PAYING ON TIME. So let’s examine this a little bit more.
This is the first paragraph of the “due on sale”
clause. As mentioned above you will find
this verbiage in your “note” and it’s only 2 sentences:
If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.
2 Really Important Legal Phrases
The first really important legal phrase to understand in
this clause is “may”. The lender MAY
require immediate payment. This is really
important to understand because the lender isn’t FORCED to require this from
us. It’s their choice. And if we leave
it up to them, they won’t…as long as we pay that mortgage. The lender MAY require immediate
payment. Let’s examine why a lender wouldn’t
do this a bit deeper:
- Payment in Full – lenders make TONS of money on
mortgages. Look at your “closing
disclosure” the next time you receive one.
You’ll see how much interest they make on page 5. It’s TONS of money. TONS.
For a lender to request a loan in full – they stop making money on
it. No lender is going to do this. Just keep paying that loan on time and you’ll
be ok.
- Performing vs. Non-Performing – For a lender to
call a note due in full they are basically re-classifying a performing asset on
their own balance sheet to a NON-performing asset. This affects a lender’s credit rating! Seriously.
This can affect their own interest rates if they went to borrower money
(and every lender does). No lender is
going to risk their own borrowing power on an already performing asset. It wouldn’t make sense. Just pay it on time.
- Cost – When a lender calls a note due, that is
essentially them foreclosing on a property.
This means they now need legal representation to do so in most
states. Just another cost that a lender
has to consider on a PERFORMING asset. Now they are spending money instead of
making it? They ain’t doing this either.
Pay that mortgage.
- Public Relation Nightmare – could you imagine if
a lender were to start foreclosing on people who are paying their mortgages on
time? This would be the dumbest PR move
in this history of banking. Banking
already has a pretty negative image in the US…maybe neutral at best…there’s no
way that a bank is going to risk its image on a loan that already makes them
TONS of money. It would backfire
completely. They aren’t calling the note
due. Have I said to pay the mortgage
enough times yet?
And you might be able to think of some other reasons
too. But it’s just that simple. Keep your mortgage servicer happy (by paying
on time) and you can certainly transfer the deed to your LLC or Land Trust or
whatever other strategy you need to do.
Keep in mind that this post is NOT addressing other things you should
consider when wrapping a note or transferring title…but just the act of
transferring title itself.
But let’s examine one other scenario – WHAT IF MY LENDER
DOES LOSE ITS MIND AND CALLS THE NOTE DUE?
That’s what the 2nd paragraph is for:
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 14 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
The 2nd paragraph here highlights the OTHER
really important legal term – “not less than 30 days”. That means they must provide you, at minimum,
30 days to change the title back to the original name on the loan. So even if your lender does lose it’s mind –
they still have to give you time to find a solution. And in most states changing the title back is
1 piece of paper. It’s really easy. Now if you did wrap the loan, changing it
back would not be possible. So just know
that going into it a wrap if something beyond reasoning, that has never happened
in the history of happening, were to happen…you would need a solution to it if
you were wrapping Fannie/Freddie money.
And yes, there are lenders who WOULD refinance a note in this type of a
scenario where you didn’t own the property anymore. The terms wouldn’t be as good but it is
possible. Again, this is really unlikely
to ever occur but you can see that there is time to find a solution if it were
to happen.
And that’s it. I hope
all of this makes sense. Thanks for reading!
