This article will dispel any misunderstandings you may have about the due-on-sale and suggest a simple, yet effective strategy to get around it What is the Due-on-Sale Clause?
Before we discuss how to get around the due-on-sale, we must understand what it is and where it came from. The due-on-sale a.
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It is a contractual right, not a law. Banks began inserting due-on-sale clauses in their mortgages in the s when interest rates rose dramatically. Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower. The banks used the due-on-sale as a way to kill their own worst competition. They argued that the reason for the restriction was to be able to police who was living in the property, the collateral for their loan.
See, e. Bank of America, 21 Cal 3d This is because colombe vendono eco slim lay people confuse civil liability with criminal liability. There is no federal or state law which makes it a crime to violate a due-on-sale clause. If the lender discovers the transfer, it may at its option, call the loan due and payable. If it cannot be paid, the lender has the option of commencing foreclosure proceedings. So the real question is: are you willing to take a property subject to a mortgage containing a due-on-sale clause with the risk of getting caught?
But, but. From a legal standpoint, a real estate agent who does not disclose the transfer to the lender has committed no breach of colombe vendono eco slim.
The Offical Utah Division of Real Estate forms also contain provisions for transfers in the face of a due-on-sale provision. There is a law in MI Sec The state bars have no problem with lawyers helping clients conceal a transfer either. In Matter of Sabato, N. It is not a bad idea, however, for any party or real estate agent to disclose the existence of a due-on-sale clause to all parties involved in the transaction so that they are aware of the risk.
Utah Rule R In Ethics Opinion No. It is a bit of stretch to apply this law to concealing a transfer that triggers a due-on-sale clause.
In fact, criminal statutes are always narrowly construed to protect the rights of citizens.
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It has never been used to prosecute due-on-sale violators. A lease of three years or more or a lease with option to purchase of any term also gives the lender the option to call the loan due. So, these companies, their employees and their attorneys would also be guilty of conspiracy to commit fraud. Furthermore, attorneys, escrow agents and other parties to a transaction would also be guilty of conspiracy to commit fraud.
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People have been taking over properties subject to existing mortgages for at least thirty years, and there have been no reported cases of criminal prosecution for hiding the transaction from a lender.
So, have hundreds of thousands of investors, borrowers, real estate agents, title company employees and attorneys breaking the law for all these years and getting away with it, or is the practice of hiding a transfer from the lender a perfectly legal transaction? You decide!
Civil Liability? In theory, a lender could sue the borrower for fraud for deliberately making a misstatement regarding the status of his loan.
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Of course, this makes no sense, because a lender would do better simply calling the loan due and foreclosing the property. Furthermore, a case for fraud requires someone to lie in the first place; keeping your mouth shut is the easiest way to avoid the issue.
The case for fraud would be pretty hard to make, since the standard FNMA mortgage agreement does not state that the borrower has an affirmative obligation to notify the lender if he transfers title or any other interest in the property. What if the borrower simply keeps his mouth shut and transfers title without making any statements to the lender? Mans, Defendant Mans bought a development property from Field, who carried a private mortgage on the property. Mans transferred title comment mincir en 1 mois an entity he and a new partner owned, then contacted Field to see if it was ok.
Colombe vendono eco slim two written letters, Mans lied and told Field that he had not yet transferred title. Years later the real estate market tanked, Mans filed for bankruptcy and tried to absolve himself of the deficiency on the mortgage debt owed to Field. The court agreed. However, Justice Ginsberg, in his concurring opinion suggested that had the borrower kept his mouth shut, there would be no fraud and the debt would have been discharged.
In theory, a lender could sue you, the buyer for fraud. In one such case, Medovoi v. Oddly enough, I did find one reported case in which the lender tried to make such an argument: Community Title Co v. In that case, a lender Roosevelt Savings sued colombe vendono eco slim title company Community Title that advocated, educated and performed closings using a contract-for-deed.
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Roosevelt lost the case. The court correctly reasoned that the title company was not liable, since the borrowers could have found some other means of violating the due-on-sale. The court noted that the lender could not prove that in a financially-distressed situation, the borrower was likely to pay off his mortgage in full rather than simply default.
The reality is, a seller who does hand you over suppléments de perte de poids au Japon property is out of options! Another interesting point the court made in the Community Title case was that the lender had no standing policy on the enforcement of due on sale clauses.
These days, most lenders will not call in loans because of the low-interest rate environment. Thus, a lender would have a very hard time proving damages, as in the Community Title case.
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A lender cannot seek a deficiency judgment against a borrower who takes subject to an existing loan and does not assume liability for it. Esplendido Apartments v. Metropolitan Condominium Assoc of Arizona, P. Attorney Jeffrey Liss, J. The attorney, therefore, is not counseling any breach of contract or breach of a business relationship.
The reward is that you avoid loan costs, personal liability for the note and conserve your cash. You can also take advantage of favorable interest rates, since an owner-occupied loan is likely going to have a lower interest rate than if you originated an investor loan.
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You can also get away with a lower down payment. The legal risk was addressed above, but what is the practical risk? That is, what is the real risk of the lender calling in the loan?
Nowadays, the risk is pretty slim. So long as the interest rate on the existing loan is within a few percent of market interest rates, the lender is not likely to accelerate a performing loan. The reason is simply profit; it costs money in legal fees to foreclose a mortgage, and the lender would rather get paid than have another non-performing loan on its books.
Of course, if interest rates rose dramatically, lenders may start enforcing the due-on-sale clauses again. Consider refinancing the loans or selling the properties if market interest rates move upward.