Due on sale clause was called by bank!

[Serge S.]

I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.

Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.

[Varinder Kumar]

How would this affect seller financing strategies? I would imagine you only have to be cautious if the loan still has a balance, correct?  I mean if it's free and clear then it doesn't matter right? Anyone please advise. Thanks.

[Roy N.]

Originally posted by @Varinder Kumar:

How would this affect seller financing strategies? I would imagine you only have to be cautious if the loan still has a balance, correct?  I mean if it's free and clear then it doesn't matter right? Anyone please advise. Thanks.

 A Vendor carry only really works if the property is owned free and clear or if the balance of the existing mortgage(s) will be retired at the time of sale (ie. they are smaller than your downpayment and/or the vendor will be paying out the balance).

If there are still mortgage(s) against the property, you are really looking at a wrap and not a Vendor carry since he vendor is only a pass-through vessel.

[Joe Bruck]

Originally posted by @Account Closed:

stop paying, gut the house/sell everything of value, break their loan obligation in bankruptcy, see how they feel then.

 Ha ha! that's funny!

[Patrick I.]

@Lynn M. Can you share how you did it? I am facing the same issue and not sure how to go about it. Lender will not allow transfer to LLC

[Samuel Ratliff]

Originally posted by @Adam Johnson:

@DeWayne Mann - the original poster, Serge, purchased/financed the property in his personal name, then quit-claimed it into his LLC for liability protection. In doing so, he violated one of the loan covenants. This may clarify things a little better. Your post seems to be more from the angle of him purchasing a property "subject to" the existing financing, but his particular situation is slightly different.

This problem could result in easier scenario and is, indeed, a very real problem when it comes up and one in which you need to be prepared to act quickly. If purchasing, you need to be prepared to "buy out" the original lender quickly. If you were the original borrower and acted as Serge had, then you need to be able to correct what was done.

As @Joel Owens stated, this is why I prefer to use portfolio lenders for all purchases made in the name of one of my LLC's. Portfolio loans, even on 2-4 family property, tend to be made under commercial terms and are therefore easier to work with as a professional investor. Using Fannie/Freddie may seem like a better option because it appears to be "cheaper" money, and it may be, but when you continue to run into walls with their guidelines, cheaper isn't always better.

Is a portfolio loan assumable? Can I wrap it? I want to purchase a residential property, and seller finance it at a higher interest rate and collect the spread after I pay back the original mortgage. What kind of loan can I get that wont come around to bite me in tbe rear later with a "due on sale" clause? I dont mind paying a higher interest rate so I can sleep at night. 

[Account Closed]

Quote from @Serge S.:

I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.

Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.

With Subject To - All things old are to become new again. Watch for loans being called due with rates going as high as they are. Better to collect 7.5% interest than 3.5%. Banks will call loans due and relend the money to other people at higher rates with new origination fees or simply add the money to their reserves to keep the Feds off their backs with "stress testing".