Minimizing the Risk of a Due-on-Sale Clause

Real estate transactions often entail terms and concepts that few people are familiar with, which can make the entire process seem more intimidating. Even experienced real estate investors can occasionally find themselves in unfamiliar territory with state and federal regulations that pertain to real estate transactions. This holds especially true with more unconventional methods of creative financing, such as “subject to” transactions. 

When purchasing a property “subject to” the mortgage, it is important to understand the risks and requirements, including the possibility of triggering the mortgage’s due-on-sale clause. You may have already heard about the due-on-sale clause, but what does it mean for your Florida real estate purchase and sale transaction?

Subject-To Financing

“Subject to” transactions are becoming a more popular method of purchasing properties, as they offer numerous benefits for both buyers and sellers. When a buyer acquires a new property “subject to” the mortgage, they take over the monthly loan payments on the seller’s current mortgage loan. Even though title (i.e., ownership of the property) transfers from the seller to the buyer, the mortgage is not paid off at closing. The buyer takes the mortgage “subject to” the transfer of title and continues to pay the mortgage loan payments each month.

For buyers, the advantages are that the mortgage interest rates are often lower than if they were to take out a new loan, there are no credit requirements, and there are no loan fees to pay at closing.  For sellers, the advantages are that they will have someone else take over a monthly loan payment that has become difficult to pay on time and they can salvage their credit as well by doing so. It also allows for a purchase to take place on a property that may have little or no equity, or is otherwise difficult to sell. However, it is crucial that “subject to” transactions are structured carefully because of the possibility of the triggering of a mortgage’s due-on-sale clause.

Due-on-Sale Clause

The due-on-sale is one of the more factors to consider if you are planning to purchase or sell a property “subject to” the mortgage. Most mortgages contain a due-on-sale clause. Also sometimes referred to as an acceleration clause, a due-on-sale clause gives a mortgage lender the ability to call a loan due – i.e., demand full payment of the remaining mortgage loan balance. It may be triggered as a result of title (i.e., ownership of the property) being transferred and conveyed without first paying off the mortgage loan in full. Lenders are not required to demand full repayment, but it is an option available to them if a due-on-sale clause is included in the mortgage contract.

Garn-St. Germain and Due-on-Sale Clauses

Due-on-sale clauses were first implemented when banks realized buyers were taking over sellers’ loans rather than acquiring new loans with higher interest rates. Many homeowners filed suits against the banks, claiming that due-on-sale clauses were unfair trade practices. Eventually, the U.S. Supreme Court ruled in favor of the banks, and Congress passed the Garn-St. Germain Federal Depository Institutions Act. This Act made it federal law that banks could enforce a due-on-sale clause, with certain exceptions.

The Garn-St. Germain Act did not make it illegal to transfer the title of a mortgaged property, so violations will not result in any criminal penalties. However, a mortgage lender may demand payment of the mortgage in full and begin the foreclosure process if the loan isn’t paid off by the deadline imposed by the lender.

The Garn-St. Germain Act, however, includes certain exceptions where a mortgage lender cannot call the loan due, such as:

• The title to the property is being transferred as a result of a divorce;
• The property is being transferred to the child or spouse of the original borrower;
• The borrower dies, and the property is being transferred via an inheritance; or
• The property title is being placed into a trust, and no change in occupancy is taking place.

How Marina Title Can Help

Though due-on-sale clauses are not commonly enforced, the risk still exists when a property is sold “subject to” the existing mortgage. Our attorney-owned and operated title company has been closing these types of transactions for over 10 years – we have the knowledge and expertise required to help you navigate the requirements and risks.

For more information about “subject to” transactions and other investor services that we offer, contact us today at (800) 604-1871 or email us at [email protected]