How To Avoid Due On Sale Clause

How to Avoid a Due-on-Sale Clause in Your Mortgage

A due-on-sale clause, also known as an alienation clause, is a provision in your mortgage that allows your lender to demand full repayment of your loan if you sell or transfer ownership of your property. While seemingly harsh, understanding this clause and exploring ways to navigate it is crucial for homeowners. This post will guide you through strategies to avoid triggering a due-on-sale clause and maintain a smooth homeownership experience.

Understanding the Due-on-Sale Clause

Before diving into avoidance strategies, let's clarify what constitutes triggering this clause. Generally, actions that might trigger it include:

• Selling your property: This is the most obvious trigger. Any transfer of ownership, regardless of the method, usually activates the clause.
• Transferring ownership to a family member: Even gifting your property to a relative can activate the clause. Lenders consider this a transfer of ownership.
• Transferring ownership to a trust: Placing your property in a trust can also be considered a transfer, potentially initiating the clause.
• Significant property renovations that substantially increase value: While less common, some lenders might interpret extensive renovations as fundamentally changing the property's nature, potentially triggering the clause.

Strategies to Avoid Triggering the Due-on-Sale Clause

Avoiding the due-on-sale clause requires careful planning and adherence to specific legal and financial strategies. Here are some options to consider:

1. Subject to Mortgage: This is a risky approach, and you'll want to discuss it with a real estate lawyer. In this scenario, the buyer makes the payments to you, and you in turn make them to the lender. However, you remain liable for the loan if the buyer defaults. This approach is high-risk because you're still responsible for the mortgage.

2. Assumption of Mortgage: This option allows the buyer to take over your existing mortgage. However, lenders are not always willing to allow mortgage assumption. They will likely check the buyer's credit and financial stability to ensure they can meet the repayment obligations. This will significantly impact your ability to proceed.

3. Wraparound Mortgage: This is a more complex strategy best discussed with your lawyer and mortgage broker. A wraparound mortgage involves taking out a new loan that encompasses the existing mortgage. The buyer makes payments on this new loan, and you make payments on your original mortgage. Again, this can be risky because you're still responsible for the original mortgage.

4. Lease-Option Agreements: A lease-option agreement allows a buyer to lease your property with the option of purchasing it at a later date. This can potentially circumvent triggering the due-on-sale clause. However, it's vital to seek legal counsel to create a well-structured agreement that protects your interests.

5. Consult a Real Estate Attorney: This is crucial before undertaking any of the above strategies. A real estate attorney can explain your specific mortgage document and provide tailored advice based on your circumstances and local laws. They can also help navigate the complex legal aspects involved in each option.

Understanding Your Rights and Lender's Policies

It's crucial to understand that the enforceability of a due-on-sale clause varies based on state and federal laws. Some states have laws that restrict or limit a lender's ability to enforce this clause. Always review your mortgage documents carefully and consult with a legal professional to understand your rights and options in your specific situation.

Disclaimer: This blog post provides general information and should not be considered legal advice. It's essential to consult with a qualified professional for guidance tailored to your specific situation.