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If it cannot be paid, the lender has the option of commencing foreclosure proceedings. If the lender discovers the transfer, it may at its option, call the loan due and payable. There is no federal or state law which makes it a crime to violate a due-on-sale clause.
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To be “illegal,” you must be in violation of a criminal law, code or statute. This is because most lay people confuse civil liability with criminal liability. Many people are under the mistaken impression that transferring title to a property secured by a “due-on-sale” mortgage is illegal.
1701-j) which codified the enforceability of the due-on-sale clause, despite state statute or case law to the contrary.
Germain Federal Depositary Institutions Act” (12 U.S.C. The banks ultimately won in a United States Supreme Court case, Fidelity Federal Savings and Loan Association v. The homeowners fought the banks in court claiming that the enforcement of the due-on-sale was “unfair trade practice” and an “unreasonable restraint on the alienation of property.” In state courts, many homeowners were winning the argument. 1984): “The due-on-sale clause was a way of eliminating these low yielding loans as soon as the property was sold, so that it could re-loan the money at current higher rates or negotiate a higher rate in the event the purchaser assumed the existing loan.” Roosevelt Savings & Loan 670 S.W.2d 895 (Mo.App. In fact, Black’s Law Dictionary defines the due-on-sale clause as a device for “preventing subsequent purchasers from assuming loans with lower than market interest rates.” This idea was also confirmed by the Court in Community Title Co v. This argument holds little water, since most banks haven’t been enforcing due-on-sale violations since the early 80′s when interest rates were high.
They argued that the reason for the restriction was to be able to police who was living in the property, the collateral for their loan. The banks used the due-on-sale as a way to kill their own worst competition. Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower. Where Did the Due-on-Sale Dilemma Come From?īanks began inserting due-on-sale clauses in their mortgages in the 1970s when interest rates rose dramatically. “If all or any part of the property herein is transferred without the lender’s prior written consent, the lender may require all sums secured hereby immediately due and payable.” Nearly all loans originated today contain a “standard” due-on-sale clause which usually reads something like: FHA-insured mortgages originated before 12/89 and VA-guaranteed loans originated before 2/88 contain no due-on-sale provisions. This means that if title to the property is transferred, the bank may (or may not), at its option, decide to “call the loan due.”Īn “assumable” loan is one which is secured by a mortgage which contains no due-on-sale provision. The due-on-sale (a.k.a “acceleration clause”) is a provision in a mortgage document which gives the lender the right to demand payment of the remaining balance of the loan when the property is sold.
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This article will dispel any misunderstandings you may have about the due-on-sale and suggest a simple, yet effective strategy to get around itīefore we discuss how to get around the due-on-sale, we must understand what it is and where it came from.
The “due-on-sale” clause is probably the most talked about, feared and misunderstood topic in real estate. There’s No “Due on Sale” Jail – How to Take a Property Subject To An Existing Mortgage There’s No “Due on Sale” Jail – How to Take a Property Subject To An Existing Mortgage by Attorney William Bronchick
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