Dallas-Fort Worth Real Estate Investor Club

HOW TO: Avoid the “DUE ON SALE” Clause

  • 27 Aug 2021 5:42 PM
    Message # 10962395

    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!

    2 files
  • 28 Aug 2021 7:55 AM
    Reply # 10963848 on 10962395

    Thanks, Andrew! Great information, especially coming from someone in the mortgage business.

  • 28 Aug 2021 12:45 PM
    Reply # 10964424 on 10962395


    Great job.  I've been doing sub-to deals and wraps for 20 years and teaching them 10+ and I have never seen the "Due on Sale Clause" explain so well and in such detail.  Thanks for this.

    It has been my experience over the years that if you pay the payments on time AND keep the property insured correctly you won't have a problem with the lenders.  Of course there are alot of details that go with this but that's the bottom line.  They want to MONEY and not the real estate so they are not trying to take houses back.

    Excellent job sir.

    Thank you

  • 28 Aug 2021 4:15 PM
    Reply # 10964893 on 10962395
    Robin Carriger (Administrator)

    Great insights from the lender's perspective, Andrew!  Very much in line with what Dick Kellett and I shared at today's meeting but with additional detail...Bravo!


    Robin Carriger
    DFW REI Club
    (817) 300-1132
  • 29 Aug 2021 9:56 AM
    Reply # 10966443 on 10962395


    You seem to be implying the bank will never call a loan due if it is current.  That is not true.  It does happen.  It is not an easy problem to solve, especially if the underlying note is wrapped.

      Neil Aggarwal
      Property Financing, LLC

  • 29 Aug 2021 3:40 PM
    Reply # 10967169 on 10966443
    Neil Aggarwal wrote:


    You seem to be implying the bank will never call a loan due if it is current.  That is not true.  It does happen.  It is not an easy problem to solve, especially if the underlying note is wrapped.

      Neil Aggarwal
      Property Financing, LLC

    Niel, I'm implying that it's extremely rare...as long as the loan is being paid on time.  In those instances where it does occur they still are required to provide 30 days notice at a minimum.  And yes, it would still be very inconvenient when that would occur but there are still lenders who could refinance that note.  Just know that going into it and make sure you have some lenders you know that have that ability and the 30 days would be enough time to refinance that loan.
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