Due on sale....is anyone seeing this

Member since 2022 · 88 posts · 38 votes

Question....with rates where they are...and where they are headed for that matter...anyone doing a sub to deal...is anyone experiencing a lender exercising the due on sale clause...I mention rates because, why would a lender not call a note that is 3.75 to recoup their money so it could be lent at the higher rate...with the spare time lenders now have to do more audits...has anyone experienced this...I get that lenders are in the business to collect payment and not own property...but if they could recover money lent at a lower rate to lend at a higher rate...why would they not...educate me....please

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Chris SeveneyBusiness Member

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

@Ryan Taylor

As long as loan is performing the answer is no. A lenders servicer is usually a different company or department and as long as payments come in, they most likely never even know

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
Nobody doing this less than 20 years knows. And even they, like me, would simply be guessing. I personally think/hope they use loan officers they would otherwise have to let go. The odds have to go up every time they raise rates. The odds would also go up if property values started to drop. As the value of the collateral drops their risk goes up. Why take higher than market risks for lower than market rates.
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Doug P.
Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
4y
@Ryan Taylor Sub2 really shouldn't be used for long-term holds. Your aim should always be for you or your occupant to refi within a few years. If the timeframe is say 5 years or less the odds of the bank calling the loan are pretty low historically. I've been at this for 22 years and I've never had a loan called.

That said as @Bill B. alluded to a rising rates + declining values scenario is exactly the reason banks started including that clause in their loans to begin with. So we can expect the risk to be higher for the next few years.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Ryan Taylor
As long as loan is performing the answer is no. A lenders servicer is usually a different company or department and as long as payments come in, they most likely never even know
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
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@Ryan Taylor
the secondary market doesn't work quite that way... The "lender" that you worked with to get the loan sells the Note off in about a month I believe. The "lender" may still service (collect the payments, take care ofa dministrattive paperwork, asnwer your calls, etc.), but the now the Note is off in the secondary market. I don't think they actually make more on a higher interest rate since they already had to pay for the Note in the first place. All this finance stuff is about rate differences, not the absolute value.
So, no, probably dont worry about it as long as the payments are being made.
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Ryan Taylor
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Member since 2022 · 88 posts · 38 votes
4y
Quote from @David M.:

@Ryan Taylor
the secondary market doesn't work quite that way... The "lender" that you worked with to get the loan sells the Note off in about a month I believe. The "lender" may still service (collect the payments, take care ofa dministrattive paperwork, asnwer your calls, etc.), but the now the Note is off in the secondary market. I don't think they actually make more on a higher interest rate since they already had to pay for the Note in the first place. All this finance stuff is about rate differences, not the absolute value.
So, no, probably dont worry about it as long as the payments are being made.

Thank you for that David...that is what I have always believed...as long as the payment is being made...no red flags raised...I understand the secondary market aspect of lenders selling debt serving...but what about a lender that retains their loans and does service their loans...does the likelihood go up...
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Ryan Taylor
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Member since 2022 · 88 posts · 38 votes
4y
Quote from @David M.:

@Ryan Taylor
the secondary market doesn't work quite that way... The "lender" that you worked with to get the loan sells the Note off in about a month I believe. The "lender" may still service (collect the payments, take care ofa dministrattive paperwork, asnwer your calls, etc.), but the now the Note is off in the secondary market. I don't think they actually make more on a higher interest rate since they already had to pay for the Note in the first place. All this finance stuff is about rate differences, not the absolute value.
So, no, probably dont worry about it as long as the payments are being made.

So you think even when there is a change of ownership through the county recorders office...and the lender is then notified of change in ownership...this wouldn't raise a red flag to them...if they are a lender that services and retains the note...
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Ryan Taylor
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Member since 2022 · 88 posts · 38 votes
4y
Quote from @Chris Seveney:

@Ryan Taylor
As long as loan is performing the answer is no. A lenders servicer is usually a different company or department and as long as payments come in, they most likely never even know

Even if a change of ownership is recorded...how would they not know...or do they not care as long as payments are being made...county recorders are required to notify lenders in a change of ownership...are they not
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Ryan Taylor
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Member since 2022 · 88 posts · 38 votes
4y
Quote from @Bill B.:

Nobody doing this less than 20 years knows. And even they, like me, would simply be guessing. I personally think/hope they use loan officers they would otherwise have to let go. The odds have to go up every time they raise rates. The odds would also go up if property values started to drop. As the value of the collateral drops their risk goes up. Why take higher than market risks for lower than market rates.

Agreed...thank you for that
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Ryan Taylor
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Member since 2022 · 88 posts · 38 votes
4y
Quote from @Doug P.:

@Ryan Taylor Sub2 really shouldn't be used for long-term holds. Your aim should always be for you or your occupant to refi within a few years. If the timeframe is say 5 years or less the odds of the bank calling the loan are pretty low historically. I've been at this for 22 years and I've never had a loan called.

That said as @Bill B. alluded to a rising rates + declining values scenario is exactly the reason banks started including that clause in their loans to begin with. So we can expect the risk to be higher for the next few years.

Thank you for that Doug...I agree with your statement of refi in the next few years...this is a long term hold...just not a long term financing option of the property...
Why do you think 5yrs or less the odds are pretty low of the note being called...are there audits that take place after a 5yr mark?? I would almost think the opposite...the first 1-3yrs being the most risky...after that, hopefully a track record of payments being made would just keep you under the radar...I'm i thinking about that correctly
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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
4y
Quote from @Ryan Taylor:

Quote from @Chris Seveney:

@Ryan Taylor
As long as loan is performing the answer is no. A lenders servicer is usually a different company or department and as long as payments come in, they most likely never even know

Even if a change of ownership is recorded...how would they not know...or do they not care as long as payments are being made...county recorders are required to notify lenders in a change of ownership...are they not

Think of the County recorder as a cork board, recording is hanging something on the board for anyone to see. The recorder doesn't do anything with that information beyond record it. Some other dept's internal to the County will receive the data and use it to trigger their operation (reassess for taxes etc), but the bank would need to go looking for the transfer. They often already do this when they check property tax info, so it's not a crazy idea that they can check ownership concurrently. I'm sure they have automations that do this for them, but again they need to do something with the info they get.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y
@Ryan Taylor
I don't necessarily think it matters whether the lender retains the loan or not... If they call the Note, then assuming they can recover their principal now they have non-performing cash...
The County Recorder only record, they don't tell or notify anybody. There is no requirement to notify. The public has to go look..
The main thing is updating the insurance clause on the mortgage. Depending on what you are doing, that might have to be updated and then the servicer will know something has happened.
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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Matt Devincenzo:

Quote from @Ryan Taylor:

Quote from @Chris Seveney:

@Ryan Taylor
As long as loan is performing the answer is no. A lenders servicer is usually a different company or department and as long as payments come in, they most likely never even know

Even if a change of ownership is recorded...how would they not know...or do they not care as long as payments are being made...county recorders are required to notify lenders in a change of ownership...are they not

Think of the County recorder as a cork board, recording is hanging something on the board for anyone to see. The recorder doesn't do anything with that information beyond record it. Some other dept's internal to the County will receive the data and use it to trigger their operation (reassess for taxes etc), but the bank would need to go looking for the transfer. They often already do this when they check property tax info, so it's not a crazy idea that they can check ownership concurrently. I'm sure they have automations that do this for them, but again they need to do something with the info they get.

Got it...I assumed/have been told, that lenders/servicers where notified of any change of ownership...this is good😁
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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @David M.:

@Ryan Taylor
I don't necessarily think it matters whether the lender retains the loan or not... If they call the Note, then assuming they can recover their principal now they have non-performing cash...
The County Recorder only record, they don't tell or notify anybody. There is no requirement to notify. The public has to go look..
The main thing is updating the insurance clause on the mortgage. Depending on what you are doing, that might have to be updated and then the servicer will know something has happened.

Good point on the non performing cash...as far as the insurance clause goes...if the policy is for a rental, and my name is on it...and not the original borrower...are you saying that would be the trigger for the DOS...
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y
@Ryan Taylor
no, not your home owner's insurance, the clause on the mortgage I believe for Title. Many people forget about that. If that needs to be updated, then they will know Title has transferred. Nothing is saying the clause will be executed..
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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @David M.:

@Ryan Taylor
no, not your home owner's insurance, the clause on the mortgage I believe for Title. Many people forget about that. If that needs to be updated, then they will know Title has transferred. Nothing is saying the clause will be executed..

I'm sorry....can you tell me what clause that would be...not sure I understand
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y
@Ryan Taylor
Do you have a mortgage? The loan needs to be placed as an additional insured. For example, if the house burns down the lender wants to be paid out by the insurance company. It does them no good to have a lien on a property with no house...
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Doug P.
Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
4y
Quote from @Ryan Taylor:

Why do you think 5yrs or less the odds are pretty low of the note being called...are there audits that take place after a 5yr mark?? I would almost think the opposite...the first 1-3yrs being the most risky...after that, hopefully a track record of payments being made would just keep you under the radar...I'm i thinking about that correctly
No there are no audits that I'm aware of. I just threw out an arbitrary number of years where it's unlikely conditions would prompt banks to go searching for loans to call. The shorter the timeframe the less likely they will call the loan.
I always like to tell new sub2 investors the story of the first sub2 deal I ever did. I went with the seller to their bank, sat down with the manager, and told him I was going to take over the payments. We signed the paperwork for all of the loan notifications to be sent to me instead of the seller, I even showed him the contract where I was agreeing to take responsibility for the sellers payments.
Would you like to know what the manager said?
"Doug, you're crazy! Are you absolutely sure you want to take on the responsibility of paying someone else's mortgage?"
No he didn't call the loan due.
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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Doug P.:

Quote from @Ryan Taylor:

Why do you think 5yrs or less the odds are pretty low of the note being called...are there audits that take place after a 5yr mark?? I would almost think the opposite...the first 1-3yrs being the most risky...after that, hopefully a track record of payments being made would just keep you under the radar...I'm i thinking about that correctly
No there are no audits that I'm aware of. I just threw out an arbitrary number of years where it's unlikely conditions would prompt banks to go searching for loans to call. The shorter the timeframe the less likely they will call the loan.
I always like to tell new sub2 investors the story of the first sub2 deal I ever did. I went with the seller to their bank, sat down with the manager, and told him I was going to take over the payments. We signed the paperwork for all of the loan notifications to be sent to me instead of the seller, I even showed him the contract where I was agreeing to take responsibility for the sellers payments.
Would you like to know what the manager said?
"Doug, you're crazy! Are you absolutely sure you want to take on the responsibility of paying someone else's mortgage?"
No he didn't call the loan due.

That's a great story...and even though he knew of an assumption...didnt seem to care...awesome
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Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
4y
I wondered about this happening for a while now. Basically another savings and loans crisis. The thing is that exercising a due on sale clause is not exactly cheap. If the owner can't pay off the loan-which they most likely can't, then they have to sell. If they can't sell, or sell in time, then the lender has to foreclose which is expensive.
Banks are not in the business of owning property, they are in the business of giving loans.
This won't really happen to homeowners as their loans are sold in the secondary market anyway, and there are a million protections in place to prevent them.
This is only possible with commercial loans where banks hold the loan on their books. At the end of the day, it's definitely possible but from what I have seen a loan that is performing with on time payments and adequate insurance is rarely ever going to get called.
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David A Lisowski
Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes
4y
@Ryan Taylor
I think you mean "due on demand."
The loan will always be due on sale of the loan is secured to the property.
If you mean due on demand feature, that's not how loans work. It closes with a lender/ broker and usually gets sold to the secondary market either individually or in bulk (with other loans).
Brokers make money when the lender funds the loan at closing.
Lenders (the people who fund the transaction, even if just temporarily) make their money when the loan is sold to an investor or secondary market. Sometimes the lender is the investor, but that doesn't mean they service the loan (or will even buy it necessarily).
The terms of the loan cannot change once you sign the closing documents. The only way the terms can change is with a new loan (unless there's a adjustable feature, but that should already be laid out in the loan terms).
If there is paperwork in the closing documents that state the note holder (lender, servicer, etc.) can execute due on demand, it's typically based off of the occupancy and/or type of loan.
For example, if you purchase the home as a primary or secondary in order to try and get a better interest rate, and then are listing the house on a rental website, it might get called due since it is being used as an investment.
Then again, there is no requirement for calling a note due if "due on demand" is part of the loan. It can be called for any reason or no reason. So they don't have to "catch" anything or be notified if the loan has the on demand clause.
More here:
https://www.consumerfinance.gov/ask-cfpb/what-is-a-demand-feature-what-does-it-mean-if-the-demand-feature-is-checked-off-on-my-closing-disclosure-en-1997/
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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Quote from @Ryan Taylor:

Question....with rates where they are...and where they are headed for that matter...anyone doing a sub to deal...is anyone experiencing a lender exercising the due on sale clause...I mention rates because, why would a lender not call a note that is 3.75 to recoup their money so it could be lent at the higher rate...with the spare time lenders now have to do more audits...has anyone experienced this...I get that lenders are in the business to collect payment and not own property...but if they could recover money lent at a lower rate to lend at a higher rate...why would they not...educate me....please
In 25 years I've had two loans called. The first was from a house I bought in 2001. After bailing him out of foreclosure, doing a Sub To and making payments for a couple of years, the property was now worth a lot more and he said that was his equity. Go figure. He contacted the bank & they got involved. That one had to be resolved in the courts. I won. I learned a lot. It was painful. But, being the consummate professional, I got over it and continued buying. I've done things differently since those lessons. No problems before that.

By the way, as I pointed out at trial, the clause says the bank "MAY" call the loan due, they don't have to. The judge took my position because the bank had received constructive notice of change of ownership since I recorded the deed, I changed the Insurance to add my LLC and I made payments from my LLC & they had waited two years to act.

The second Due on Sale was in 2020 when I was busy flipping a couple of houses and had a couple of house waiting (all bought with Subject To) and one of my vacant properties was a Reverse Mortgage. Squatters moved in, caused a ruckus, police were called and the bank was notified to clean up the property. In a Reverse Mortgage the loan is due automatically if the borrower dies or moves out of the property. So, I received a letter asking for payoff or they'd foreclose, so I paid them off.

Yes, if you get the bank involved, it's likely they will call the loan due (for various reasons). And, there are solutions for each of the situations that can occur.
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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Quote from @David A Lisowski:

@Ryan Taylor
I think you mean "due on demand."
The loan will always be due on sale of the loan is secured to the property.
If you mean due on demand feature, that's not how loans work. It closes with a lender/ broker and usually gets sold to the secondary market either individually or in bulk (with other loans).
Brokers make money when the lender funds the loan at closing.
Lenders (the people who fund the transaction, even if just temporarily) make their money when the loan is sold to an investor or secondary market. Sometimes the lender is the investor, but that doesn't mean they service the loan (or will even buy it necessarily).
The terms of the loan cannot change once you sign the closing documents. The only way the terms can change is with a new loan (unless there's a adjustable feature, but that should already be laid out in the loan terms).
If there is paperwork in the closing documents that state the note holder (lender, servicer, etc.) can execute due on demand, it's typically based off of the occupancy and/or type of loan.
For example, if you purchase the home as a primary or secondary in order to try and get a better interest rate, and then are listing the house on a rental website, it might get called due since it is being used as an investment.
Then again, there is no requirement for calling a note due if "due on demand" is part of the loan. It can be called for any reason or no reason. So they don't have to "catch" anything or be notified if the loan has the on demand clause.

@David A Lisowski: Your Comment: "It can be called for any reason" is not accurate.

The Garn-St. Germaine Act of 1982 prevents arbitrarily calling a loan due.

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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Quote from @Ryan Taylor:

Quote from @David M.:

@Ryan Taylor
no, not your home owner's insurance, the clause on the mortgage I believe for Title. Many people forget about that. If that needs to be updated, then they will know Title has transferred. Nothing is saying the clause will be executed..

I'm sorry....can you tell me what clause that would be...not sure I understand

By the way: Assumption and Subject To are two entirely different things. Assumption is approaching the lender and qualifying for the loan according to the lender's guidelines and getting lender approval. Subject To is simply taking over the responsilbility of the debt and making the payments, usually without notifying the lender.
@Ryan Taylor: Here is what the Clause actually says:

18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser. If all or any part of the Property or any Interest in property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent,

Lender may require immediate payment in full of all sums secured by this Security Instrument.

However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law. If Lender exercises this option Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.

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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Account Closed:

Quote from @Ryan Taylor:

Quote from @David M.:

@Ryan Taylor
no, not your home owner's insurance, the clause on the mortgage I believe for Title. Many people forget about that. If that needs to be updated, then they will know Title has transferred. Nothing is saying the clause will be executed..

I'm sorry....can you tell me what clause that would be...not sure I understand

By the way: Assumption and Subject To are two entirely different things. Assumption is approaching the lender and qualifying for the loan according to the lender's guidelines and getting lender approval. Subject To is simply taking over the responsilbility of the debt and making the payments, usually without notifying the lender.
@Ryan Taylor: Here is what the Clause actually says:

18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser. If all or any part of the Property or any Interest in property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent,

Lender may require immediate payment in full of all sums secured by this Security Instrument.

However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law. If Lender exercises this option Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.

Thank you for that Mike...that's pretty much what I read on the note...there seems to be alot of different experiences with this...and i think every one of them is unique...no one can say with certainty that a note will or will not be called...I think it is a risk that has to be carefully calculated....at least that's the way I see it
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David A Lisowski
Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes
4y
@Mike Hern
Quite literally from the CFPB, but maybe there's something more recent:
https://www.consumerfinance.gov/ask-cfpb/what-is-a-demand-feature-what-does-it-mean-if-the-demand-feature-is-checked-off-on-my-closing-disclosure-en-1997/
"What is a demand feature? What does it mean if the demand feature is checked off on my Closing Disclosure?
The Closing Disclosure has a statement that reads "Your loan has a demand feature," which is checked "yes" or "no." A demand feature permits the lender to require early repayment of the loan.
If the demand feature is checked "yes," the lender can require that you immediately pay the entire loan balance (principal and interest) at any time. The lender can make this demand on you for any reason or for no reason. Be sure to check your Closing Disclosure and promissory note for any demand features. Think carefully about whether you want to agree to a demand feature."
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