Can the bank call a 30 year loan due at any time for any reason!?

18 Replies

I was speaking to another Real Estate Investor who lost money on several rental properties in the 2009 economic downturn. I was curious to learn from him how he lost properties (or was forced to sell for a loss) if they were rented for more than the monthly PITI + HOA. I assumed that he was going to tell me some horror story about his tenant losing their job, property damage, evictions, etc… However, he stated that he had no problem with any of that.

He said that his bank called all his loans due because they were short on cash themselves from the downturn. I asked how the bank can call a loan due if they were paid current and no other provisions had been broken (i.e. "Due On Sale" Clause); which is when he mentioned that loans for investment properties do not have the same protections as those for a primary residence – and therefore the bank can call the loan(s) due whenever they wish... IS THIS TRUE?

So I can have a 30 year fixed rate loan on an investment property and the bank can call that loan due immediately on a whim!?! If so, then I must slow down and completely change my strategy to avoid the need for bank loans if that rug can be yanked out from under me at any time. I heard a passing reference to something similar to this in a BP podcast, so it is my second time hearing of this possibility in one week. How can the BRRRR strategy work safely if this is an ever present risk?

Thanks,

J.T.

I haven't ever heard of a current loan being called unless your trying to transfer title to an LLC or other entity.

You just discover the Archilles heel of the BRRRR. While many investors have 10-20 properties, many which are not paid off, the bank do have the right to exercise the due on sale close and bye bye properties.

Better strategy is to get 10 BRRRR properties max that way you reach your conventional loan limit and try to pay them all off ASAP.

Just imaging 10 payoff properties and some being multi, that cash flow is sweet.

I will stop at 10 and then go to developing.

LOC's, yes. Conventional loans, no. Your buddy is just telling you crap, to hide his screw ups, trying to save face.

No bank in this solar system ever called a performing note due and payable.  Sounds like someone maybe spent rent payments on other things besides mortgages they were intended to pay and got behind the 8 Ball...

Actually @Charlie Fitzgerald is quite wrong. Maybe not in USA but in every country I invest in banks can call up any note at any time. New Zealand, Australia they recalled many loans in the GFC to reduce their exposure. 30 year fixed loans without default, can be called at any time. Sounds like USA is different but they would be the exception. I don't have bank loans in the US so I can't check the fine print.

I'll stipulate to the possibility that other countries have different language in their note language.  Generally, these forums on BP are speaking about USA issues, unless the OP indicates otherwise and my reference to the "solar system" was for effect, not a literal reference.

Thanks for the responses... The concept that a 30 year fixed rate loan can be called due on a whim just because it is an investment property floored me as something that can't possibly be true (a random balloon clause)... So i'm reading my mortgage docs from start to finish to see if any such language is present. I have also contacted my lender to ask about this possibility directly. I'll have to re-listen to the BP podcasts in which this was mentioned in passing to reach out to the person that said it for more details.

J.T.

HELOCs, hard money, private money, etc, can contain whatever provisions the borrower and lender agree to, to the extent that the law allows it. During the Great Recession, many found that their HELOCs had their lines frozen, meaning folks had to pay it back according to the original agreement, but couldn't draw upon it any more (relevant to the "I have a HELOC and will wait for the supposed downturn that is allegedly always right around the corner to purchase!" -- not if they freeze your credit line, you aren't).

Agency 30 year fixed loans cannot be called due unless the borrower misbehaves. Relevant to a question that comes up on this forum once a week: If you call it a primary residence, meaning that you promise at the closing table to move in within 60 days and live there for a year, and eight months later you still haven't moved in? That would be an example. And OP is basing this thread on a Great Recession anecdote, so it's completely plausible that the borrower in question engaged in some of the fraud that was rampant in 2005-2007. For example if an audit discovered that they got 5 owner occupant mortgages in a six month period...

Note that even when/if a note is called due, that just means you need to pay the mortgage off. One common way that mortgages get paid off, is through refinancing. 

I think your buddy was BSing you. It just does not happen when things are current.

Thanks for the information from your buddy. I have never heard of a conventional being called back.

Performing loans do get accelerated from time to time, if the bank finds out the due on sale clause has been violated. Yes, it's rare. Yes, I've had it happen to me. Yes, I know other investors that have had it happen. Yes, it was in this country and this solar system. :)

However, the question was about whether a performing loan that had NOT violated any loan provisions could be called due. I really doubt it would happen. But it's possible, depending on what they put in the note, especially if it wasn't a traditional lender or bank.

A lot of notes have a line to the effect of "if borrower violates any provision of this note, then lender may call it due". So in that scenario, if the lender really wanted to call it due, they could probably figure out some minor provision that had been violated.

@Jonathan Smith If you're at all familiar with Dave Ramsey's story, he went bankrupt due to the bank calling all of his outstanding notes. According to him, he was current, but the bank holding the notes was sold to a bigger bank that decided to call the loans due. Granted, this was back in the 80s, and times have changed. However, that is why he is a huge advocate for zero debt of any kind and firmly believes that any investment property be purchased in full in cash. Extreme for most/many, but a great way to avoid the risk!

Hello @Jana Cain - No, I was not aware that Dave Ramsey went bankrupt in that manner; however I do listen to his show occasionally and I'm very well aware of his strong position on zero debt investing. When I started my REI journey last year I had $100K to invest, so I considered his advice, but without leveraging OPM, I could only buy 1 house with that money, and it would take me years to afford the second... Too Slow. Whereas I now have 6 properties with loans and expenses being paid in full by my tenants and still putting cash in my pocket. I like that much better, as long as the rug cannot be pulled out from under me at my lender's whim.

Further, after rehabs my properties have equity present beyond my 20% down, so I've considered doing a cash-out refi to pull some of that out to get still more properties with leverage of OPM. Then the subject of this thread came up and I got scared at the thought of the notes being called due for no violation on my part and losing it all. I've since re-read my docs and do not see any such "cause we felt like it" clause... Everything I found required some fault or fraud on my end. I've also inquired on this directly with my lender, and they said the same.

J.T.

@Jonathan Smith I do find conversations about debt ("OPM") usage quite fascinating. DR mentions all the time about folks getting into trouble with money (debt) due to impatience, which he directly correlates to entitlement ("I want it now, I deserve to have it now, so I'll do whatever it takes to have it now"). This forum is full of investors who are pro debt ("leverage") and post about how they aim to borrow as much as possible for as long as possible. I've seen others proudly speak of properties they bought in cash and still own free and clear (which means everything cash flows positively). For myself, my goal is to be somewhere in the middle (but closer to less debt vs more). Having racked up plenty of "normal" consumer debt prior to wising up about personal finance, I can officially say that I'm totally over making debt payments on things (regardless of whether it is some form of installment (like a mortgage) or in full (like a credit card)) and despise the idea of hands being out for my money when I get paid. Lol. 

I gleaned an interesting tidbit from one of the podcasts (can't remember which one, as I started from #1 and am now on #97), and the guest gave his opinion that "if you can't afford to keep it vacant, you can't afford to keep it". This was in regards to needing to keep a property 100% full at all times in order to afford the cost, which in turn can make you desperate for tenants, which in turn could cause you to cut corners in your screening, etc. I thought that was worth noting for myself as I map out my investing plans.

Lastly, I think it's great that lenders include clauses indicating on what grounds they can call their notes. Personally, I'd always be wary, though, since at the end of their day, it's still their money. I 100% understand why calling a note could not always be in their favor (the expense of waiting to collect, risk of foreclosing, and and and...), but I know if it were me, I would always want to hold (if not wield) the power to demand that I want my money back. Good thing I'm not a lender. :-)

Happy investing!

@Jana Cain , I certainly cannot disagree with any of that; however, I do believe that there is such a thing as both "good" and "bad" debt that can be determined by means other than just impatience. I'm in a fortunate position that even if my rentals were 100% vacant at the same time, I'd still be able to handle the expense, because my wife and I are gainfully employed and I have several businesses that provide sufficient income. My goal is to own all properties free and clear within 10 to 15 years; and I set my extra principle payments accordingly. But to avoid debt (leverage) entirely as DR suggests honestly seems silly to me - but I do not think I'm Dave's primary audience. For those who are, that is likely the best possible advice.

For instance, in one of my rehabs I put in $6K worth of flooring, and I put it on a 12 month same as cash card, and just setup an auto-payment of $500. That keeps $6K in my pocket to do other things with and let's me use OPM for FREE. I can now invest that $6K in something else to leverage my wealth even further. But I do so with much forethought, carefully, and with reserves, so as not to become overextended.

Creative financing, HMLs, AIDTs, and ignoring the terms can easily get you into trouble. I went with a Commercial Load because 1) it was a 6-unit MFU and 2) the bank was assured the property would sustain the loan (The DSCR is the assurance).

It's annoying to provide 'financial data' every year - - B I G deal.  The loan moved several times within a portfolio, but we outlived all those load service companies. :grin:

Rule 1: know the rules, rule 2: FOLLOW them

Hi Jonathan,

A lot happened in the mortgage world as a result of the crisis. Many of my clients with HELOCs, mortgage companies called in their loans. This may sound obvious, but check/find out from the prospective lender their rights, before you sign on the dotted line. If they have the right to call your loan, that language will be included in the mortgage agreement. 

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