The world of real estate can be daunting, filled with complex jargon and legalities that can confuse even the most experienced investors. Among these complexities is the "due-on-sale" clause — a common but often misunderstood provision in mortgage agreements.
When it comes to purchasing a home, there are plenty of intricate details to keep in mind. One of the lesser-known clauses you'll need to be aware of is the due-on-sale clause.
Put simply, if you're looking to sell your home, you may be required to pay off your entire mortgage balance if this clause is included in your contract. This can cause potential buyers to hesitate to make an offer, as they'll be taking on your mortgage payments, and lenders will likely start clocking interest immediately.
On the bright side, this clause isn't always bad – it can help increase your home's value and even result in a quicker sale. However, it's important to be aware of the potential implications before diving too deep into the home-buying process.
How Does the Due-on-Sale Clause Work in a Mortgage Agreement?
A mortgage agreement is a legally binding agreement between a lender and borrower, outlining the terms and conditions of a loan used to purchase a property. And as you’ve learned, one critical clause to note in a mortgage agreement is the due-on-sale clause.
This particular clause enables the lender to demand payment in full on the loan if the borrower sells their property without obtaining the lender's approval. Essentially, if the borrower attempts to transfer ownership of the property, the lender can exercise their right to accelerate the loan and demand full repayment of the outstanding balance.
As you can imagine, it’s a crucial provision to understand before entering into a mortgage agreement, as it may impact a borrower's decision to sell their property in the future.
An assumable mortgage is a unique type of home loan that allows a potential buyer to assume the seller's mortgage. It’s also often spoken about in the same conversation as the due-on-sale clause.
The assumable mortgage means that instead of getting a new mortgage, the buyer simply takes over the seller's existing mortgage, which has already been approved and has a set interest rate.
Buyers can find this type of mortgage particularly attractive as it may offer a lower interest rate. They may also be more accessible to qualify for than securing a brand new mortgage themselves.
It's important to note that assumable mortgages aren't as standard as they once were, so it's worth discussing this option with your lender if it's something you're interested in.
Lenders include this clause to protect their interests. It prevents the loan from being assumed by someone who might not meet their credit standards or who might not agree to the loan's current terms.
For sellers, the due-on-sale clause can limit the flexibility of structuring the sale, especially if they plan to allow the buyer to assume their mortgage. For buyers, it can potentially limit the options for financing the purchase.
There are certain exceptions where a lender cannot enforce the due-on-sale clause. These include cases of property transfer between family members upon the borrower's death or a spouse or children assuming the property.
The Garn-St Germain Act and its exceptions to the due-on-sale clause
The Garn-St Germain Depository Institutions Act of 1982 further provides several exceptions to enforcing the due-on-sale clause, such as transferring the property into a living trust where the borrower is a beneficiary.
Transfer of Property to an LLC and the Due-on-Sale Clause
Transferring a property to an LLC could potentially trigger a due-on-sale clause. Since the property is being transferred from an individual to a business entity, the lender might see this as a risk and demand full loan payment.
Effects & Considerations for Property Owners
Before transferring a property to an LLC, property owners should consider the potential of triggering the due-on-sale clause. Consulting with a real estate attorney or professional can help you navigate this complex process.
Homeowner insurance plays a critical role here. If a due-on-sale clause is triggered and unfulfilled, the lender could foreclose the property. This could lead to property loss, making insurance extremely important.
It's essential to maintain proper insurance coverage on the property, especially if there's a risk of the due-on-sale clause being invoked. Always keep your insurer informed about any changes in ownership or other significant property changes.
The due-on-sale clause is a critical aspect of mortgage agreements that all parties involved in a real estate transaction should understand. It can significantly impact the sale and purchase of properties and has major potential legal and financial implications.
Navigating the due-on-sale clause requires careful planning, knowledge, and professional guidance. Always consult with a real estate professional or attorney to ensure you're making informed decisions. Remember, understanding the details can make a significant difference in successful real estate transactions.
And if you need help finding the best homeowners insurance coverage for the best price, start by speaking to a SimplyIOA agent at 833.872.4467 or get a homeowners insurance quote online now.