Q & A Saturday – What is the Due On Sale Clause?

Welcome to our Q & A Saturday video.

In these Q & A Videos we will answer your questions about real estate.  Any real estate related topic from questions about selling your house, buying a house, real estate investor questions, land lording questions, local market questions and many others things are all fair game. 

Today’s question is “What is the Due On Sale Clause?

Due On Sale Clause Mortgage - Massachusetts and New Hampshire Real Estate

In this video Shaun discusses what a “Due on Sale Clause” is in a mortgage.

 

Some of the main points covered in this video are:

1)      What is the “Due On Sale Clause”

2)      How it relates to Seller financed real estate transactions

3)      What is “Subject To” and how it is related

4)      Dangers of the Due On Sale Clause

5)      Ways to avoid triggering it

6)      How is gives the bank the right, but not the obligation, to call the loan

 

The “Due On Sale Clause” is standard language you find in pretty much any mortgage and note written by a bank over the last 30+ years.  Prior to that time it was very common to sell a house “Subject To” the existing mortgage.  At that time interest rates were well into double digits for mortgages and banks did not want to miss out on originating much higher interest notes. 

This clause gives the bank the right, but not the obligation, to call the note due if there is a title transfer of any sort.  The one exception is it is transferred into a trust for estate planning purposes (This is also a work around that some investors will use to make it less likely for a due on sale issue to come up).  The most common time for an issue to arise is when an investor buys a property Subject To or with a Wrap Mortgage.  When doing these things the new owner continues to pay the existing mortgage.  If the bank becomes aware of the title transfer they can call the note due.  If this happens the new owner will need to pay off the loan, refinance the loan, sell the house to pay off the loan, transfer the property back to the original owner or let it to foreclosure.  This last part is the risk in a sub-to or wrap situation since while the new owner loses the property and anything they put into it the original owner will have the foreclosure on their credit.  Ethical investors will not let that happen and in the worst of cases will deed the property back to original owner.  It is fairly rare for a bank to invoke the due on sale clause if the loan is being paid as it is a difficult and expensive task to do a foreclosure and they have enough non-performing notes to worry about.  However it DOES happen and it is a risk.

 

Hope you enjoyed the video and leave any other questions you have about the topic below or any other topics you would like to see covered in future videos.  I encourage anyone that has things they would like to talk about to let me know what they are.  You can always fill out a contact us form here and put Q & A in the subject, just leave a comment with your questions below here, send an email to info@masshomesale.com, or post it on our Facebook page or Twitter account.

 

Resources mentioned in the video and some other useful resources and good articles:

–          Our Video on Seller Financing

–          Our Video on Subject To Financing

–          Our Video on What a Wrap Mortgage is

 

 

 

 

(Image Credit: Adaptation of lowest mortgage rate via blog.credit.com)

 

 

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