Your Loan Has A Due On Sale Clause

[Ken M.]

For years now, all loans have had a "Due On Sale" clause. That means it has to be paid off when the property changes hands, unless the lender approves an assumption. An assumption is not a "Subject To" or called a "SubTo". Assumption and Subject To are different.

Subject To  is the cheapest financing you will find.

That means technically, if ownership, or a part of ownership has changed hands for any reason, or in some contracts "is planned to change hands in the future", the bank has the right to call the loan due. That means they can issue a demand for payback, before the financing term is completed. If that payback isn't timely made, they can force a foreclosure sale. 

By the way, being in foreclosure does not mean the borrower has already lost the house. There are remedies, but that's for later. 

When a Due On Sale is enforced, the lender must notify the borrower of the violation in writing, stating how to "cure" that particular violation and allow a set amount of time for the borrower to fix the problem or the borrower will lose the house. The house could be being used as a rental and losing the house could violate your agreement with the renter. Or if you had sold it but kept the financing, it could violate your agreement with the buyer. Either way, you could get sued. However, there is a safe way to do these.

Banks do not like to wind up with properties, (called REO, Real Estate Owned) It costs them money and they lose the ability to lend a certain percentage of their assets, which is controlled by the regulators. It looks bad to investors and sometimes loan officers get fired. Banks are all about making lots of money, "safely".

The important part is to note, is that it is not illegal to sell a house using various techniques that violate the Due On Sale clause.

It is smart though, to have a solution ahead of time, for each of the common reasons a note gets called. There are solutions, but these are not areas you want to "guess" at.  In 30 years and uncounted properties, I've only had two Due On Sale called. One was in 2008 ( I did something stupid) and one was in 2020. If someone has had more than a couple called, they are doing something wrong and need proper training from someone like us. You avoid poison ivy by not walking in the woods, but you walk in the woods anyway, so just know where the bad stuff is.

[Don Konipol]

Another bag of popcorn, please