Due on Sale Clauses
You are trying to sell your property in a difficult real estate market. You finally find a buyer, but the buyer cannot qualify for a conventional mortgage. She wants to assume your mortgage and have you take back a second mortgage. You are prepared to do that. But wait!
Standard Fannie Mae and Freddie Mac mortgages have Due on Sale clauses in them. Such clauses provide that if you transfer your property to someone else, the lender can require immediate payment of the note in full. Such clauses became prevalent in the days of high interest rates, when the assumption of a low-interest rate loan was desirable. You cannot get around the clauses with a bond for deed, contract for deed, installment sales contract or escrow agreement.
A federal statute provides some exceptions where the lenders cannot enforce the due on sale clauses:
- A second mortgage
- A purchase money mortgage for household appliances
- A transfer on death to a joint tenant or tenant by the entirety
- A lease of three years or less without an option to purchase
- A transfer to a relative resulting from the death of a borrower
- A transfer where the spouse or children of the borrower become an owner
- A transfer resulting from a divorce decree, legal separation agreement, or other property settlement agreement, by which the spouse of the borrower becomes an owner
- A transfer into a trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
- Any other transfer described in regulations prescribed by the Federal Home Loan Bank Board.
12 C.F.R. § 591.5(b)(1)(vi) limits exception 8 above and requires that before a transfer into a trust occurs, the borrower must agree to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the legal or beneficial interest in the property or change in occupancy.
This regulation was instituted because all over the internet are directions on how to “beat” Due on Sale clauses.
Kristi Kendrick, a semi-retired Eureka Springs lawyer, has compiled some of the more common questions she has been asked in her 40+ years of practice. She has been AV-rated by Martindale-Hubbell, the highest peer rating in ability and ethics, for more than 20 years.