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| There is No Due on Sale Jail | |
| The "due-on-sale" clause is probably the most talked about, feared and misunderstood topic in real estate. This article will dispel any misunderstandings you may have about the due-on-sale and suggest a simple, yet effective strategy to get around it. Before 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 (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. It is a contractual right, not a law. 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." An "assumable" loan is one which is secured by a mortgage which contains no due-on-sale provision. FHA-insured mortgages originated before 12/89 and VA-guaranteed loans originated before 2/88 contain no due-on-sale provisions. Nearly all loans originated today contain a "standard" due-on-sale clause which usually reads something like: "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." Banks began inserting due-on-sale clauses in their mortgages in the 1970s when interest rates rose dramatically. Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower. The banks used the due-on-sale as a way to kill their own worst competition. They argued that the reason for the restriction was to be able to police who was living in the property and the collateral for their loan. 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. 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 Company v. Roosevelt Savings |
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