| The "due-on-sale" clause is probably the most talked | | | | as a device for "preventing subsequent purchasers |
| about, feared and misunderstood topic in real estate. | | | | from assuming loans with lower than market interest |
| This article will dispel any misunderstandings you may | | | | rates." This idea was also confirmed by the Court in |
| have about the due-on-sale and suggest a simple, yet | | | | Community Title Company v. Roosevelt Savings & |
| effective strategy to get around it. | | | | Loan 670 S.W.2d 895 (Mo.App. 1984): "The |
| Before we discuss how to get around the | | | | due-on-sale clause was a way of eliminating these |
| due-on-sale, we must understand what it is and | | | | low yielding loans as soon as the property was sold, |
| where it came from. The due-on-sale (a.k.a | | | | so that it could re-loan the money at current higher |
| "acceleration clause") is a provision in a mortgage | | | | rates or negotiate a higher rate in the event the |
| document which gives the lender the right to demand | | | | purchaser assumed the existing loan." |
| payment of the remaining balance of the loan when | | | | The homeowners fought the banks in court claiming |
| the property is sold. It is a contractual right, not a | | | | that the enforcement of the due-on-sale was "unfair |
| law. This means that if title to the property is | | | | trade practice" and an "unreasonable restraint on the |
| transferred, the bank may (or may not), at its | | | | alienation of property." In state courts, many |
| option, decide to "call the loan due." | | | | homeowners were winning the argument. See, e.g., |
| An "assumable" loan is one which is secured by a | | | | Wellenkamp v. Bank of America, 21 Cal 3d 943 |
| mortgage which contains no due-on-sale provision. | | | | (1978). The banks ultimately won in a United States |
| FHA-insured mortgages originated before 12/89 and | | | | Supreme Court case, Fidelity Federal Savings and |
| VA-guaranteed loans originated before 2/88 contain | | | | Loan Association v. de la Cuesta, 102 S.Ct. 3014, |
| no due-on-sale provisions. Nearly all loans originated | | | | (1982). Congress thereafter passed the "Garn-St. |
| today contain a "standard" due-on-sale clause which | | | | Germain Federal Depositary Institutions Act" (12 U.S.C. |
| usually reads something like: | | | | 1701-j), which codified the enforceability of the |
| "If all or any part of the property herein is | | | | due-on-sale clause, despite state statute or case law |
| transferred without the lender's prior written consent, | | | | to the contrary. |
| the lender may require all sums secured hereby | | | | Many people are under the mistaken impression that |
| immediately due and payable." | | | | transferring title to a property secured by a |
| Banks began inserting due-on-sale clauses in their | | | | "due-on-sale" mortgage is illegal. This is because most |
| mortgages in the 1970s when interest rates rose | | | | lay people confuse civil liability with criminal liability. To |
| dramatically. Home buyers were assuming existing | | | | be "illegal," you must be in violation of a criminal law, |
| loans rather than borrowing new money from banks | | | | code or statute. |
| because the interest rates on existing loans were | | | | There is no federal or state law which makes it a |
| lower. The banks used the due-on-sale as a way to | | | | crime to violate a due-on-sale clause. If the lender |
| kill their own worst competition. They argued that | | | | discovers the transfer, it may at its option, call the |
| the reason for the restriction was to be able to | | | | loan due and payable. If it cannot be paid, the lender |
| police who was living in the property and the | | | | has the option of commencing foreclosure |
| collateral for their loan. | | | | proceedings. |
| This argument holds little water, since most banks | | | | So the real question is: are you willing to take a |
| haven't been enforcing due-on-sale violations since | | | | property subject to a mortgage containing a |
| the early 80's when interest rates were high. In fact, | | | | due-on-sale clause with the risk of getting caught? |
| Black's Law Dictionary defines the due-on-sale clause | | | | |