Due On Sale clause

[Ryan Boyce]

I heard Clay Huber's podcast about land contracts and have a question. 1)With a due on sale clause in a mortgage can you get a writen approval from the bank to do a land contract for owner finance? 2) Can you do a owner finance if you still are paying on the mortage? I would like to do an owner finance on my current primary residence but we still owe on the contract and after hearing podcast 16 I think it is a brilliant idea to do an owner finance and move on to our next house. Thank you for any help you can provide.

Ryan

[Jon Holdman]

Unlikely any bank will give you permission to sell the house with any sort of owner financing. If you ask, you will most likely be told that you must pay off the loan if you sell the house.

People can and do sell houses with various sorts of owner financing while they still have a mortgage on them. The due on sale clause gives the lender the right, but not obligation, to call the loan due. If they do, and your end buyer cannot refinance or otherwise pay off the loan you've given them (which will allow you to payoff your original loan), then the lender will foreclose.

Now, this is currently very rare. However if rates rise (they were 15% for OO loans when I first started looking at houses in the early 80's) you can bet banks will start looking for properties that have been sold like this and calling these loans.

IMHO this is a temporary solution. If you do it you want to the buyer to be fully aware of the risks and be prepared to deal with the situation if the lender does call the loan.

From your perspective, the best option is a lease with option to buy (ha!) That give you the most control. A land contract would be next, a wrap next after than and subject to the worst. As in a subject to deal gives you essentially no control over the buyer where a lease/option gives you the most.

Also be aware of laws regarding any sort of owner financing if the buyer is going to occupy the property. These have become more and more stringent.

Why do you want to do owner financing rather than a straight sale?