Remember the 70’s? Long gas lines, the Iran Hostage Crisis, macramé, and sky-high interest rates. By the early 80s, mortgage interest rates were up around 18%! Homeowners who took mortgages with traditional lenders paid astronomical house payments to banks and mortgage companies.
Enter the creative consumer. Some people balked at these rates and naturally tried to circumvent price gouging as they saw it. As interest rates climbed, certain savvy property buyers simply elected to transfer the title into their name and pay the existing mortgage rate — that rate the seller got when they first bought the same house.
Makes sense, doesn’t it? These were the original subject to loans as we refer to them now. It didn’t take long for these creative financial vehicles to catch on with buyers and homeowners. It was a way to acquire a house without assuming a loan with completely absurd interest rates.
Well, what do you think the banks thought of that? Not much. Thus began the “Due on Sale” clause.
No way were the banks going to allow people to do a transaction that meant the bank lost out on the higher interest rate their competitors were getting for a similar home! Bankers got together and decided that, if the house traded hands, the original lender had a right to call the loan due in full. The bank would insist on payment in full. If payment was not received, then the bank could foreclose.
Foreclosure at that time would have been no big deal. They simply turn around and make their money back with a new high interest loan on the same house.
Basically, all the banks adopted this clause. No surprise…they are in the business of making money — not losing it!
Fast forward to 2013. Interest rates are still under 5% — still less than consumers paid even two to three years ago. Although rates are just now beginning to inch up, banks are happy to collect payments on mortgages made at any interest rate — especially when many homeowners are still having trouble making payments at all.
Anyone selling their home with a subject to transaction should be aware of the Due On Sale clause, yes, but should you fear it? Let’s talk about that…
The following are questions you should ask of your buyer or investor: Does he have a good reputation and references? Is he able to make to make payments? Does he have experience in San Antonio real estate markets? Does he run a business or is he just winging it? Is this his first deal? Is there anything else you want to know about selling your house subject to the existing loan, and what are the risks?
All of these are fair questions to ask.
If your buyer can’t answer these, then sure, your confidence that your loan would be called due might be shaken a bit. But if your buyer can address these issues, then you’ll probably understand that they don’t want to lose equity in the property any more than you do!
Why the big scare tactics surrounding the Due on Sale clause? Although it is not illegal — in fact, there has never been one single case in which a lender brought charges against a consumer for selling a house subject to the financial terms already in place — the bank does have the right to call note due if the title is transferred to another party.
In this financial climate, there are just two reasons why they might do that: if payments were not being made, and if suddenly there was loads of paperwork associated with the said loan and they suspected they were on the losing end of the deal.
The best way to predict the future is to understand history.
According to William Bronchick, president and co-founder of the Colorado Association of Real Estate Investors, “Black’s Law Dictionary defines the “due on sale” clause as a device for ‘preventing subsequent purchasers from assuming loans with lower than market interest rates.’ “
According to that definition, and your situation — your current interest rate and the one being offered by mortgage companies today — you be the judge.
When people hear the words “Due on Sale Clause” a lot of them freak out. (Battling a huge financial institution would stress anyone out!) But the fact is that there is very little to worry about. As long as they are getting their money on time, banks tend to be happy to collect your payments and go merrily on their way.
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Do you want to sell your house fast in Texas for top dollar with the least hassle? Give us a call! (210) 853-2788 or click the button below.
Photo credit Flickr CC: Metro Mortgage Lending