Returning to this topic, the second issue of concern that I raised regarding subject-to transactions was the failure to have a good exit strategy in the event the loan balance is accelerated by the lender.
Once a lender discovers that the property has been sold without paying off their loan, they may decide to invoke what is known as the “due on sale clause”. Most mortgages/deeds of trust contain a DOS clause. It gives the lender the right — not the obligation — to demand payment in full.
A couple of questions might come to mind. First, how would a lender discover the transfer?
- name change on tax bill — since lenders monitor these records to be sure taxes are being paid, they would become aware of most title changes
- insured change on policy — lender would be notified since they are the mortgagee on the policy
- mailing address change
- monthly payment change that the buyer does not discover because they are not receiving notices
- automatic payments set up from an account named differently other than the original borrower
- seller admits the violation when contacted by lender
Second, why would a lender who is receiving timely payments care about the transfer?
- buyer is not bound to the covenants of the original loan
- compliance issues — loans pledged to FHLB would suddenly not be compliant; with loans sold to investors such as Fannie Mae or Freddy Mac the sub-to would violate seller/servicer agreements; fair lending scrutiny issues
So the issue of whether or not a lender invokes the due on sale clause and accelerates the loan balance (i.e., demands that the entire loan balance be paid within X days) often does not come down to simply whether a loan is performing (being paid on time) or non-performing. It’s a matter of the lender following regulations and contract terms.
What can a seller and buyer do when the due on sale clause is invoked? Pay the loan in full, either through cash on hand, refinance or resale. Don’t believe everything you read. There is no such thing as “due on sale insurance”. Nobody is going to step in and “fix” the situation once the lender demand has been made. It’s either pay off the loan or the property will be heading to foreclosure.