Enforcing the due on sale clause?
I have been looking at preforeclosure investment as a way to make a profit by stopping the foreclosure of a family home. Other than a sale at a discount, if the seller has some equity and its a price appreciating neighborhood; and trying a short sale if the lender can be convinced to discount the loan, the only other strategy I can think of is a "subject to" where I take over the seller’s primary loan. Does any one know if lenders as a principle will act on that clause or are they more flexible this year?
Hmmm, I think what you are proposing is that you get title but the loan stays in the seller’s name.
In practice, here in Missouri at least, it’s rare for the lender to try to enforce this clause. I am not a lawyer, but I understand that this clause -sometimes you will hear refernce to an "acceleration clause"- is a contractual right and not a law so to transfer title secured by a "due on sale" mortgage is not illegal.
If the lender later discovers the transfer he/she may at his/her option call the loan due and payable.
I haven’t noticed any change in the attitude of the banks at all, it seems they would rather have the timely payments than the hassle of foreclosure.
If the payments are missed at any later stage, it’s the seller’s credit rating that is affected!
To protect all involved there is another strategy you can consider and other documents that could form part of your deal (The "Trust assignment" ) but see your attorney first. And check on your State law.
March 15th, 2010 at 12:04 pm
If they find out it is family, it will not be considered an arm’s length transaction. Lenders are tightening up, not loosening their terms.
References :
March 15th, 2010 at 12:17 pm
The 100% accurate answer to that question is definately….I don’t know.
Usually, if the interest rate is higher on the existing loan than on the new loan…they will not enforce it. However, it does happen and I know a person to whom it happened to. He explained that the old loan was 8 percent and a new one would only get the bank 6 (something) but they were insistant.
As long as the payments are made on time…they may not even realize it.
I would think with the high number of foreclosures, you may be able to convince them otherwise but it’s just impossible to say. Every bank is different.
I would suggest that you do the subject to ONLY IF you have a way to get cash quick…(personal money, hard money, etc…) so you are covered. I think you have about 45-60 days to come up with the funds but I suggest you do your own due diligence.
References :
real estate investor
March 15th, 2010 at 12:53 pm
Hmmm, I think what you are proposing is that you get title but the loan stays in the seller’s name.
In practice, here in Missouri at least, it’s rare for the lender to try to enforce this clause. I am not a lawyer, but I understand that this clause -sometimes you will hear refernce to an "acceleration clause"- is a contractual right and not a law so to transfer title secured by a "due on sale" mortgage is not illegal.
If the lender later discovers the transfer he/she may at his/her option call the loan due and payable.
I haven’t noticed any change in the attitude of the banks at all, it seems they would rather have the timely payments than the hassle of foreclosure.
If the payments are missed at any later stage, it’s the seller’s credit rating that is affected!
To protect all involved there is another strategy you can consider and other documents that could form part of your deal (The "Trust assignment" ) but see your attorney first. And check on your State law.
References :
http://www.foreclosuredatabank.com/law.php