Acceleration & Due on Sale Clause trigger?

[Account Closed]

Hello BP, i read quite a number about using creative financing but how many of those may trigger acceleration & due on sale clause? I know seller finance and Sub2 can trigger it but what other types of creative financing that i'm unaware of can trigger it as well?

[Hattie Dizmond]

To be clear...

First, "triggering" the DOS clause doesn't mean the lender is going to call the note due. Lenders don't like turning performing assets into non-performing assets.

Second, there are events that may "trigger" a Due on Sale investigation, without actually activating the DOS. i.e. A transfer to a living trust, where the borrower maintains a beneficial interest in the property AND doesn't sign a document forfeiting their right to occupy the property.

Finally, you can do just about anything you want, as long as you get the lenders prior written approval. So, if you want to buy a property Subject To existing financing or do a Wrap on the existing mortgage, you can do those without the worry of the DOS clause. You simply have to disclose it to the lender and get their written approval. In general, as long as the lender remains in first/senior position, and you can show ability to repay, they are not likely to call the note due. Again, lenders want performing assets. They are in the business of lending money, not owning property.

This entire discussion is governed by the Garn–St. Germain Depository Institutions Act of 1982, which Brian linked above. The specific DOS regulations were put in place to protect borrowers, NOT lenders. It was written during a period when mortgage lending rates were incredibly high. Lenders were using the DOS clause to call due mortgages that were issued with very low rates, thus forcing borrowers to refi at much higher rates; ensuring bigger profits for the banks. The Act expressly forbids this practice where the transfer is simply into a trust, with the borrower maintaining interest & occupancy rights. It also says lenders are "encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates..."

Short version, I prefer upfront honesty.  Just go to the lender and get their written consent.