If you’re thinking of selling your home, you might be wondering: “What are due on sale clauses?” The good news is that most lenders don’t enforce this clause when the property isn’t sold. Usually, this is because borrowers don’t seek permission from their lenders before deeding the property to someone else. However, in some situations, the due-on-sale clause is valid and you may not need to deed the property. You’ll want to consult your lender to make sure.
Exceptions to a due-on-sale clause
Besides owner financing, certain types of transfers are exempt from the due-on-sale clause. Examples include transfers made in connection with divorce, adding children to a joint ownership agreement, or adding a spouse to an existing joint ownership agreement.
Assumable mortgages can be attractive for buyers, especially when interest rates are high. Assuming an existing mortgage allows the new owner to pick up the payment where the original owner left off. For example, if you had a VA loan and sold the property, the new buyer could inherit a mortgage contract with a lower interest rate than the previous owner had. In addition, the new buyer would not have to deal with loan paperwork.
Besides being more lucrative for buyers, due-on-sale clauses also protect lenders from losing money on substandard loans. By requiring buyers to pay off the entire balance of a mortgage contract, this clause protects lenders from the risk of losing money on properties they cannot sell. It also prevents homeowners from passing their debt onto an unknown buyer. It also keeps the home from becoming a “second home,” where the homeowner is unable to sell.
When to invoke a due-on-sale clause
Many people try to get around a due-on-sale provision by lying to their lenders or insurance companies. In many cases, people will lie on purpose or ask others to lie to get around the due-on-sale clause. However, if you’ve made a promise to keep the lease option secret, you’ll have to break it, regardless of whether it’s true or not. This type of behavior isn’t ethical for the lender and close family members involved.
There are several times when it may be necessary to invoke a due-on-sales clause. For instance, if you have a wraparound mortgage – known as an “all-inclusive deed of trust” – the lender can call your loan due if you don’t pay off the mortgage. However, there are some exceptions to this rule.
In most mortgages, the due-on-sale clause is optional. If your lender thinks that a new buyer will take over the mortgage, it may be in their best interests to not invoke it. Alternatively, if your home has lost value significantly and your new buyer cannot afford to pay the full amount, the lender may agree to accept less than the balance of your debt.
Avoiding a due-on-sale clause
When real estate investors hear the phrase “due-on-sale clause,” they cringe. They worry that they could be held liable for enormous sums of money if they fail to sell the property. In addition, they might not have had the chance to make necessary repairs or rent the property out. If you’re a newbie, you may wonder how to avoid a due-on-sale clause.
The best way to avoid a due-on-sale provision is to transfer your property into a trust or to name yourself as the initial beneficiary. Then, send a copy of the trust to your mortgage lender, who will then have no reason to enforce the due-on-sale clause. Sadly, some home buyers fail to send the beneficiary change to the lender and are forced to assume the existing mortgage.
Another way to avoid a due-on-sale provision is to obtain a wraparound mortgage. Essentially, you are getting a junior loan that combines the costs of your existing loan and any equity you have built up in the property. Ultimately, the buyer is responsible for making regular installment payments to the seller and will use part of the payment to pay off the original mortgage loan.