What exactly is a due on sales clause. how can i protect myself from this. and how bad will it hurt me
the bank loaned you money based on your personal creditworthiness.
therefore, if you sell, gift, trade, transfer or otherwise remove yourself from the property, they will call the balance of the mortgage due upon the sale, transfer, gift, etc.
don’t sell, gift, trade, transfer or otherwise attempt to get the property out of your name.
Transferring a property to an entity doesn’t usually cause much of a problem.
The due-on-sale clause is now in almost every mortgage. It allows the lender to accelerate the note (“call the loan”) if the property secured by the mortgage is sold or otherwise transferred.
However, it is incorrect to say that the lender “will” call the loan due. In fact, I have never heard of a lender calling a loan due for a due-on-sale violation as long as the payments were still being made. Certainly it could happen and probably does happen from time to time. Certainly it would happen if interest rates went up to 10% or higher.
But now? I can’t imagine it happening. Banks do not want to be in the business of foreclosing and owning houses. They are in the business of loaning money and getting paid back. As long as they are getting paid back, why would they foreclose on a current loan?
Also, please note that the sale is not necessarily a violation of the contract (i.e., a default). Many due-on-sale clauses say that the property transfer simply gives the lender the right to accelerate the note. But it’s not a default that’s going to get you sued. When in doubt, read the mortgage!
Great advice, Drew Shirley.
I specifically asked a residential loan officer at a local bank if I got financing in my own name and then quit claimed the property to my LLC if that was OK and he said that they would call the loan due if I tried to do that…don’t know if he was just threatening or what but needless to say we didn’t end up going with that bank.
Jake, when you did your quit claim, did you do it on your own or pay an atty to do it? If the latter, was it very expensive to do?
I didn’t end up actually needing to do the quit claim, rather, it was just a strategy I was exploring at the time to try and qualify for financing in my own name (when I really wanted to title the property in my LLC).
We ended up finding a lender to do the commercial loan for the property so the quit claim wasn’t needed.
Thanks. Was it an apartment building (to get a commercial loan)?
No, it was just a SFH, but since we wanted the financing in the name of our LLC it pushed us into the commercial side.
Thanks.