A due-on-sale clause is a provision in a mortgage promissory note that stipulates the full balance of the loan may be called due (paid in full) upon sale or transfer (conveyance) of ownership (either full or partial) of the property used to secure the mortgage. This provision as also sometimes referred to as an “acceleration clause”. Mortgages with a due-on-sale clause are not assumable. This clause helps protect lenders against below-market interest rates.
Due-on-Sale Clause
A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage. The holders of a below-market-interest-rate mortgage – or a mortgage-backed security, asset-backed security or collateralized debt obligation backed by a below-market-interest-rate mortgage – generally favor early retirement of that mortgage.
What does this mean?
It is a deterrent for transferring ownership and/or name(s) on the promissory note to an “un-qualified” barrower.
Experiences dictates that if the note is being satisfied (paid) regularly the clause is rarely to NEVER exercised.
Can I do a conventional loan in the name of my entity?
Yes and no… Fannie Mae/Freddie Mac will not allow the title or promissory note be opened in the name of an entity, but what prevents you from oh say changing name after closing?
In my experience, rarely to never have I heard or read of a lender exercising the Due-on-Sales Clause, IF THE NOTE IS BEING PAID ON TIME. The lender wants their money (actually just want the interest being paid), NOT YOUR PROPERTY.
How can we make this work?
Once you have closed in your personal name, and subsequently made 3 payments to the lender we reach out to a title company to convert the title from “you” to the name of your entity. This would cost roughly $200 and is of course recorded with the county at which the property is located.
What if they catch me?
If by random chance the lender is trying to make an example out of you then we have options… flip the note back into your name or refinance. Keep in mind, for no reason does the lender of a conventional product want your property!
The Bottom Line
As a borrower an investor you are most likely looking to take wonderful advantage of conventional interest rates on investment properties and still have the security, protection you have from the entity you set up to hold your investments. Knowing the purpose and intension of the “Due on Sales Clause” while being able to circumvent this will allow you to take full advantage of both. Have your cake and eat it too! 😉
“IF YOU KNOW, YOU KNOW PRODUCTION 😉”
Thanks to Investopedia.com and the team Blink Lending.
Due-on-Sale Clause, Protecting the Property with my Entity.
A due-on-sale clause is a provision in a mortgage promissory note that stipulates the full balance of the loan may be called due (paid in full) upon sale or transfer (conveyance) of ownership (either full or partial) of the property used to secure the mortgage. This provision as also sometimes referred to as an “acceleration clause”. Mortgages with a due-on-sale clause are not assumable. This clause helps protect lenders against below-market interest rates.
Due-on-Sale Clause
A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage. The holders of a below-market-interest-rate mortgage – or a mortgage-backed security, asset-backed security or collateralized debt obligation backed by a below-market-interest-rate mortgage – generally favor early retirement of that mortgage.
What does this mean?
It is a deterrent for transferring ownership and/or name(s) on the promissory note to an “un-qualified” barrower.
Experiences dictates that if the note is being satisfied (paid) regularly the clause is rarely to NEVER exercised.
Can I do a conventional loan in the name of my entity?
Yes and no… Fannie Mae/Freddie Mac will not allow the title or promissory note be opened in the name of an entity, but what prevents you from oh say changing name after closing?
In my experience, rarely to never have I heard or read of a lender exercising the Due-on-Sales Clause, IF THE NOTE IS BEING PAID ON TIME. The lender wants their money (actually just want the interest being paid), NOT YOUR PROPERTY.
How can we make this work?
Once you have closed in your personal name, and subsequently made 3 payments to the lender we reach out to a title company to convert the title from “you” to the name of your entity. This would cost roughly $200 and is of course recorded with the county at which the property is located.
What if they catch me?
If by random chance the lender is trying to make an example out of you then we have options… flip the note back into your name or refinance. Keep in mind, for no reason does the lender of a conventional product want your property!
The Bottom Line
As a borrower an investor you are most likely looking to take wonderful advantage of conventional interest rates on investment properties and still have the security, protection you have from the entity you set up to hold your investments. Knowing the purpose and intension of the “Due on Sales Clause” while being able to circumvent this will allow you to take full advantage of both. Have your cake and eat it too! 😉
“IF YOU KNOW, YOU KNOW PRODUCTION 😉”
Thanks to Investopedia.com and the team Blink Lending.
