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