WE’RE HEARING about due on sale clauses. Not in the traditional sense where a mortgage must be paid off when a property is sold but rather in other circumstances. These other circumstances include death and when someone has a rental property that they want to transfer into a corporate entity. In all of these situations a mortgage on the property is essentially the 900-pound elephant in the room that needs to be addressed.
Recently I was contacted by an attorney who wanted to know if his client who owned a rental house could transfer the property to the client’s LLC without the mortgage lender being able to foreclose. Stated another way he wanted to know if this transfer was one of the exceptions under federal law to a due on sale clause contained in every mortgage. The simple answer is no but that overlooks what is going on.
I had the same situation a few months ago. Basically you have a consumer who wants to have their cake and eat it, too. They want the benefit of limited liability on the rental in case someone gets injured and sues them. They also do not want to incur the costs of a commercial loan. They want a residential mortgage. Or they do not want to do a refi of the residential loan into a commercial loan.
As an attorney you have to warn the client that the transfer can lead to a foreclosure. An alternative is to ask the lender for consent. My experience is the lender will not consent and I find no fault with that. If you want to invest in real estate you should realize it is not a hobby and it costs money to do so.
Death is another scenario where the due on sale clause shows up. However, a transfer to a relative is an exception to triggering a due on sale clause. This means that if the surviving relative pays the mortgage monthly they get to stay. The transfer of the real estate to them by inheritance will not in and of itself lead to the loan being called in. Of course this does not mean there will not be other issues.
I just had a client whose wife died and the home they lived in was just in her name. The home had a mortgage on it and the lender would not speak with the husband. I fixed that by doing a probate. Then there was a problem with the insurance where the lender tried to force place the insurance on the home. The lender was provided with proof of insurance and a copy of the new deed to the property where the husband became the owner from his wife’s estate.
The lender was apparently confused by this and sent another letter giving the husband a short period of time to provide proof of insurance otherwise the lender would force place it. So I wrote a letter which I generally find is a waste of time but this time it worked. Perhaps the threat of complaining to the OCC got someone’s attention. But wait there is more.
Because the husband was not on the loan the lender claimed they did not have to speak with him and some other nonsense about not providing him with income tax information. Since the husband is paying the mortgage he would like to be able to deduct the mortgage interest he is paying. I then referred the husband to a tax pro who said he could fix the problem.
Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at email@example.com.