Real Estate News & Commentary

Changes to Due-on-Sale Clause Silently Enacted by Fannie Mae: A Win for Investors

Expertise: Personal Finance, Business Management
50 Articles Written
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While changes in law can be slower than Christmas, institutions like lenders and banks can change their regulations far more easily. Sometimes even critical alterations can be made to accounts without your knowledge, because internal rules like this run in the background. So, unless you signed up for the Fannie Mae newsletter and read it closely, it’s highly unlikely you’ve heard the good news. Stay tuned, particularly if you’re a single family investor, for updates regarding the due-on-sale clause.

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Frankly, the reason this is flying under the radar is because it’s also legal news. Absent celebrity involvement or story-worthy crime, you’re unlikely to see this kind of legal and financial news in The Economist—even below the fold. So, it’s a good thing you found your way here to BiggerPockets. As of June 2019, this article is actually the first complete piece on this subject at all.

Let’s cut right to how Fannie Mae’s regulations have changed the implications for the due-on-sale clause. These changes (so far) only affect Fannie Mae customers, but it’s possible other lenders or banks will catch on and follow suit. We could be looking at legal changes depending on where the ball goes from there.

Here’s what we know now: Real estate investors should all take note—or at least take this time to brush up on lending practices, property transfers, and due-on-sale trivia and tricks.

What’s Happening With Fannie Mae and Due-on-Sale?

In short, Fannie Mae simply announced some policy changes. The biggest change is that any loan secured after June 1, 2016, does not require the investor to occupy the home for it to be exempt from the due-on-sale clause. This makes owning and transferring investment properties vastly easier for the investor and allows for not only more opportunities and more profit but also some legal fee and structure savings.

Don’t get me wrong. You will still need an entity of some sort for a comprehensive asset protection plan. But where the rubber tends to meet the road is when you start moving the properties into the structure, as mentioned above. Property transfer is what tends to trigger due-on-sale. But if you plan ahead and do things correctly, legally, and with sound advisers on your side, you need not worry about this little clause at all.

Related: Are You Afraid of the Due on Sale Clause?

What Does the Due-on-Sale Clause Change Mean for Real Estate Investors?

We love to openly, flagrantly mock the due-on-sale clause at my firm, calling it the Bigfoot/Loch Ness Monster of real estate law, the bogeyman, and Bloody Mary. This time, we’ll come out and say it: This mortgage clause is really the Big Bad Wolf. Everyone knows about and fears it, but they certainly can’t tell you what it looks like or its alleged dangers.

Peek around your favorite professional social networks and message boards. You’ll see a whole bunch of due-on-sale TALK, but you’ll never find people describing how their life was ruined by violating the clause. By contrast, you’ll find many a story on BiggerPockets of a life-ruining, or at least nuclear-level inconvenient, real estate lawsuit. Investors who are regular readers of my asset protection work already know that lawsuits can be prevented—so can due-on-sale issues.

You’ve never met victims of this clause, because they don’t exist. If you looked, you’d have a hard time finding someone truly screwed by due-on-sale. Any horror story, especially compelling ones, would either be fake or necessarily involve an AWOL attorney. That’s how difficult it is to get into meaningful trouble over the due-on-sale clause, and we’ve been over the “horrific” worst-case scenario of a letter from the bank. You will survive.

If, however, you’re visiting from the future, thanks for spending your valuable time-traveling minutes to cruise by BiggerPockets and check on us. Now, go tell everyone who’s about to lose money if you wish to use your powers for good. If you wish to use your powers for evil, at least have the courtesy to take it elsewhere!

Why Is Fannie Mae Addressing Due-on-Sale Exemptions?

Like any business, lenders must cater to what customers want. Absent a public statement, we can only deduce or speculate intention.

Investors are attractive targets for lawsuits and companies for the same reason: We tend to have money to spend. Fannie Mae knows due-on-sale clauses are a legitimate struggle industry-wide and also interfere with investors wanting their products.

So, they remind investors to do business with them. They may offer us something we can use or have their ad department whip up a nice and pretty pamphlet geared toward REIs chasing success. It appears there are potentially some products aimed at investors rolling out, which I won’t describe because I don’t work for free. Ever.

Fannie Mae is making a gesture to let us know they’re trying to make lending to LLCs easier. By removing a huge barrier to REI entry/growth, they’re luring us. It’s smart marketing and frankly, a trend investors can dig.

Related: Fannie Mae & Freddie Mac: Who Are They, Why Do They Exist & How Exactly Do They Work?

What If My Student Loans Came From Fannie Mae? Does That Change Anything?

Some of you may have another Fannie Mae product. Really, it's likely one: student loans. Or more precisely, the company owns your student loan debt, either because they issued the loan in the first place or they literally bought it.

For a lender, other people's debt is basically an asset. But we're guessing if you're reading this, you may be like most people connected to Fannie Mae. The sole debt you're likely to walk in with by adulthood is student loan debt, possibly directly from the lender you wish to approach on real estate matters.

But even if you owe Fannie Mae for school, their regulations still apply to you. Barring irresponsibilities like defaulting on prior loans, you should be able to use other financial products from them or any lender. Real estate and small business loans count, and it starts with forms to fill out. You’ll certainly be submitting a new application, and here’s to hoping your finances are more impressive than in the college days.

In fact, most lenders WANT repeat business. Companies as large as Fannie Mae have tons of resources, including sharp marketing departments. Marketing departments love their data and will watch you like a hawk (or better yet, have some robots do it and report back). You can count on the big lenders knowing at least these things:

  • Your financial history with them
  • Your credit score
  • Some financial history pre-dating their records
  • Your lending record, debts, and income information

If you want a product and have a decent record with the bank, student loans shouldn’t interfere.

Avoid Financial & Legal Problems by Understanding Your Mortgage’s Due-on-Sale Clause

You may ask the bank directly about LLCs—but at your own risk. Many investors prefer to have one of the professionals on your real estate dream team do this kind of dirty work for them.

One thing you can do now is continue what you’re up to already. Learn more about the due-on-sale clause, the asset protection entities that you think will work best for you, and more. Keep a massive file (even a collection of bookmarks on a mobile or laptop helps) for reference.

The more informed and educated you are, the more likely you are to select the correct tools for both your budget and lawsuit prevention strategy. Assuming you do, there’s no reason you can’t stay out of trouble—and more importantly, out of court.

Do you have any follow-up questions for me about the due-on-sale clause and what has changed? 

Ask me in the comment section below. 

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real esta...
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    Duane Kidman Professional from Mansfield, Texas
    Replied 6 months ago
    The effective date for mentioned changes in Due on Sale Clause was March 1, 2018. My experience is that lenders are slow to learn about these types of changes, and even slower implementing. For more information see Fannie Mae announcement: https://www.fanniemae.com/content/announcement/svc1710.pdf
    Account Closed from MA
    Replied 6 months ago
    I like that you called FM the boogey man. LOL Duane I checked the link you sent. The memo and effective date was from 2017. It seems like this has been in effect for a couple of years, and perpetrate the due on sale clause myth?
    Brett C. Rental Property Investor from NH
    Replied 6 months ago
    I struggled to find any nugget of actual information in this article.
    Joe J. Rental Property Investor from West Lafayette, IN
    Replied 6 months ago
    Same. He “doesn’t work for free. Ever,” he says, which I guess means this is essentially just an advertisement?
    Chand Ramlakhan
    Replied 6 months ago
    Thanks! I thought I was the only one.
    Matthew Adair Rental Property Investor from Chicago, IL
    Replied 6 months ago
    Very intrigued about the products aimed at investors that potentially may be rolling out. Hopefully will hear more about this from the great contributors at BP!
    Jonathan Killam from New Hampshire
    Replied 6 months ago
    This is wonderful news! Top notch informative article. Thank you very much.
    Lear R. Investor from El Paso, TX
    Replied 6 months ago
    The due on sales clause really isn’t a boogeyman, Wells Fargo actively watches the titles of properties that have a mortgage, and if you move it to a LLC, they will give you 90 days to put it back in your name, or they will initiate the due on sales clause, they send nice letters to let you know before hand, for me it only cost 100 bucks to move it in and out of my LLC. I believe this maybe the trend to the future, Wells Fargo does tend to lead the industry in this stuff so I’m sure other banks will start doing this if they don’t already.
    David Calhoun Investor from Princeton, NJ
    Replied 6 months ago
    Interesting. Hopefully, the big banks follow thru.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 6 months ago
    Good news and thanks for letting us know!
    Arya Jackson from San Francisco, Bay Area
    Replied 6 months ago
    Wow, this is awesome. Thanks for this awesome article!
    Brit F. Rental Property Investor from DFW
    Replied 6 months ago
    If there is *new* information Fannie (newer than the 2017 announcement), can you post a reference - maybe a screenshot or link to the aforementioned newsletter? Regarding the 2017 changes, I wrote three articles in the Member Blog to shed some light (hope it's okay to mention here). The first one covers the process/details of completing a property transfer to one's own LLC with a Fannie-owned loan, and the other two articles show my adventures working with three different Servicers - lots of screenshots, references, quotes, etc. It's a long read, admittedly. It was fun to battle a multi-billion dollar top 3 mortgage originator/servicer.
    Celia Rudder Investor from Tucson, Arizona
    Replied 6 months ago
    "You’ve never met victims of this clause, because they don’t exist. If you looked, you’d have a hard time finding someone truly screwed by due-on-sale. Any horror story, especially compelling ones, would either be fake or necessarily involve an AWOL attorney. That’s how difficult it is to get into meaningful trouble over the due-on-sale clause, and we’ve been over the “horrific” worst-case scenario of a letter from the bank. You will survive." Is this because people don't challenge it so therefore you don't meet any victims? What exactly is the point here. I am really confused. Or was that the point? to lead us to consult an attorney. I read the article twice and the summation is that Fannie Mae has made a change. This could have been said in one paragraph.
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied 6 months ago
    I have had them happen to me personally so here is one person that has had a lender call a loan as we alienated the title. common NO but can it happen yes and does it happen yes.