Due-On-Sale Clause Related Questions
Can a person transfer title from an individual’s name to an S-Corp without “tripping” the due-on-sale clause in a mortgage? If an individual adds a soon-to-be spouse to the Deed of property before the marriage will it set off the due-on-sale clause in the mortgage? The due-on-sale clause is a provision that gives the lender of a mortgage the right to demand payment of the remaining balance of a loan when property is sold or transferred. Entering into a mortgage is a huge step for many people. It is important to know your rights and responsibilities as a borrower. Read below where verified real estate law Experts answer these questions.
Is the due-on-sale clause valid and enforceable in the state of Georgia?
Yes, it is legal and enforceable under Georgia state law.
If a homeowner who has property in an inter vivos land trust of which the individual is the sole beneficiary and not the Trustee, instructs the Trustee to lease out the residence for a period of three years or less, and the Trustee does so without first obtaining the lenders permission, would doing so likely trigger the due-on-sale clause?
No, it would not because the lease is three years or less and does not contain an option to purchase the property. Thus, the lease from the Trust falls under the exceptions to the due-on-sale clause. Also and most importantly, the due-on-sale clause is hard to enforce for the obvious reason that the lender cannot enforce what the lender is unaware of. The lender will not know about the transfer unless the borrower accidently informs the lender of the lease. The lender does not monitor transfers related to its secured interests.
Is it illegal to violate the due-on-sale clause on a mortgage when seller finances utilizing an all-inclusive trust deed (AITD)?
Illegal means committing a crime. This is not a crime, it is considered a breach of contract.
If a person purchases property in his or her personal name and then later quit-claims the property to a limited liability company, can the mortgage company call the loan due with the due-on-sale clause?
Yes, the mortgage company can call the loan due, because the original owner is no longer the legal owner of the property. Since the obligation to pay remains, but ownership does not, the lender can demand either a call of the debt, or a refinance in the new owner’s name.
Can a person transfer title from an individual’s name to an S-Corp without “tripping” the due-on-sale clause in a mortgage?
The status of a separate legal entity under state law means that title to assets must be transferred from the individual owner’s name to the company’s name. The same means is used to transfer real estate to an unrelated third party. With real property if there is a loan secured by the property, problems may arise with the “due-on-sale” clause. This clause allows the lender to accelerate the note when title is transferred and to require full payment of the outstanding balance of principal and accrued interest within a limited amount of time (usually 30 days). It is possible that the individual can get around this by asking the lender to allow the transfer to the single member S-Corp. If lender does agree, this will need to be in writing or a waiver from the lender before doing the transfer.
If an individual adds a soon-to-be spouse to the Deed of property before the marriage, will it set off the due-on-sale clause in the mortgage?
If the property is mortgaged, adding the soon-to-be spouse to the title before the marriage will likely trigger the due-on-sale clause. The addition after the marriage will not, and he or she can then be added as a “tenant in common” or “joint tenant.”
If wife, who solely holds the mortgage to property, passes away, but husband keeps mortgage payments current, will the mortgage company be unable to accelerate due-on-sale clause?
Under federal law, preemption of due-on-sale prohibitions, a lender is legally prevented from calling a loan due or trying to accelerate payments based on the death of a borrower.
Can an individual transfer ownership interest to property to a corporation that he or she has interest in without causing due-on-sale clause in property mortgage to take effect?
The individual will need to explain to the mortgage company that this is not a change in ownership because individual holds an interest in the corporation. Also, obtain permission in “writing” from the mortgage company that acceleration of the due-on-sale clause will not take place.
When it comes to purchasing property and obtaining a mortgage, many questions may arise. It is a relief to have someone to turn to for help and to find answers to your questions. Verified Experts are available, day or night, at your convenience, from the comforts of your home, to give you accurate, knowledgeable answers to your questions regarding real estate issues.