Virtually all Recent Real Estate Loans Made in the U.S. Include a Due-on-sale Clause

A stipulation in a promissory note or loan or that allows the loan balance to become due on a transfer of ownership or sale of property that is securing the note is referred to as due-on-sale clause. The lender possesses a right, but not obliged, to call the note due and payable in such situations.

Virtually all recent real estate loans made in the U.S. include a due-on-sale clause. Differing to the widespread availability of assumable real estate loans that were arranged in past years.

A significant exception was shaped by the Garn – St. Germain Depository Institutions Act in 1982. A most important provision allows any party to put real estate in a trust they own trust, and not activate the due-on-sale clause. A lender cannot call the loan legally while the grantor continues to be "a beneficiary" among numerous possible beneficiaries. This clause allows for using trusts to leave property to minors and heirs. It may also shelter the property of the wealthy or owners at risk against any possibility of any lawsuits or creditors in the future, since the trust is the the property owner, not the individuals who may be at risk. A clause in the bill goes on to say "...A lender may not exercise its option pursuant to a due-on-sale clause upon a transfer into an inter vivos trust in which the borrower is and remains A beneficiary and which does not relate to a transfer of rights of occupancy in the property". (The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d) .

A due-on-sale clause might possibly be something to be concerned about tor an investor property owner with a desire to carry seller financing employing a wraparound mortgage to a potential purchaser This arrangement activates the due-on-sale clause in existence on the seller's base mortgage and consequently the existing lender may attempt call the note. In a situation such as this, if the seller doe not have have enough money available to pay off the entire note balance, the bank could actually foreclose on the loan. Considerable deliberation exists in the investing public as to the likelihood a bank would actually call the note in such a case. Early in the 1980s, when interest rates were at 18%, lenders made some attempt to enforce these sections, but in the lending market of today lenders are not nearly as likely to insist on it, and as a mater of fact will not call it unless they looking for some other basis to call the note. Jan 10, 2011 -

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