Understanding Due-on-Sale Clauses

Anyone who has sought and/or secured a mortgage loan is likely familiar with “due-on-sale” clauses (often referred to as “acceleration clauses”). These provisions are built into almost all mortgage contracts to protect lenders from certain practices and interest rates that sit below the market standard at that time.

The provision is as it sounds in the title – the entire balance of the mortgage becomes due on the sale of the property in question. So, where do these come from and what do they mean for you as a buyer or Florida real estate investor?

Due-on-Sale History

These clauses were written into mortgages starting in the 1970s. During this time, interest rates were skyrocketing. These put buyers and real estate investors in a bad and expensive position. To get around the rising rates, buyers would purchase properties from the current owner and just assume the current mortgage responsibility – meaning the lender wouldn’t be able to write a new mortgage that reflected the rising interest rates.

In the years that followed, state and federal governments discussed and legislated these clauses to make sure both the lender and the owner(s) of the property were protected. Some states moved to prohibit these clauses in part or entirely, but the federal government eventually preempted those attempts, allowing all federal lenders (and some others) to implement all due-on-sale clauses with certain specific and historical exceptions.

When Do They Apply?

As mentioned above, these clauses apply during the “sale” of a property held under a mortgage. However, it’s not simply a “sale” but also a transfer of ownership. We’ve recently discussed the multiple ways homeowners and Florida real estate investors can control and manage their properties. This includes holding properties in your own name, structuring them within an LLC, and forming a land trust.

There are obvious benefits to transferring your properties into a limited liability company – but doing so actually creates a change in ownership. The LLC will become the legal owner of the property which will likely trigger any due-on-sale clauses within your mortgage. Using a land trust to manage your properties, however, allows you to avoid these changes in ownership that would trigger the clause.

What Are the Exceptions?

As we just mentioned, land trusts are one way you can sell or manage your property without risking an acceleration clause from hitting your checkbook. This is the most efficient and straightforward way to avoid this and might even be the best option for your property, your family, your business, and your estate plan.

If you don’t use a land trust to manage your property then you still have options. Due-on-sale clauses may automatically trigger but you can actually flat out ask the mortgage lender for an exception. It’s highly unlikely lenders would ever consider an exception in situations where you’re just selling the property, especially if interest rates have recently increased.

Other exceptions explicitly provided under U.S. Code § 1701j–3 include:

  • Ownership transfer to a spouse or child following a divorce or legal separation
  • Ownership transfer to a spouse, child, or other relative following the death of the borrower
  • Ownership transfer to a joint tenant following the death of the borrower when a joint tenancy agreement is present

The best way to navigate due-on-sale clauses is to work with an experienced attorney. At Bryant Taylor Law, we help real estate buyers and investors get their real estate holdings structured for success. Our team can help you avoid an acceleration clause or prepare for the consequences should the clause be unavoidable. Contact our team and schedule a consultation today.

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