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How "Due on Sale Clauses" Effect Creative Financing
In the early 1970's lenders began installing a clause in mortgage notes to  protect  themselves against allowing mortgages to be assumed or passed on from  one borrower to another without the lender's permission to do so. This "due on sale clause" gave the lender the right to approve the transfer of the mortgage note to another borrower and the ability to increase interest rates and payments on those notes to reflect the current interest rate levels. In the event that the original borrower did not notify the lender that they had transferred the note by assumption or other means, to another borrower, the lender had the legal right to call the entire mortgage note due and payable at once!

Today virtually all conventional mortgage notes that are written contain some form of due on sale clauses. There are only two types of mortgage loans which do not contain these clauses on an across the board basis. They are both government backed loans -( 1) VA loans, and (2) FHA loans. Therefore VA and FHA loans are assumable at the original interest rate. VA and FHA loans made before 3/88 and 12/89 respectively, can be creatively financed (contract for deed, second mortgage, wraparound, lease purchase, etc.) In order to make the home more marketable! Note: FHA loans made after December, 1986 and VA loans made after March,
1988, may require buyers to qualify on assumptions.

Even though the vast majority of conventional loans contain a due on sale clause, there are ways to avoid having a low interest rate loan escalated all the way up to market rates. One method, which is not suggested is the "silent contract for deed:' That is, the house is secretly sold without the lender's knowledge through seller financing and the sale is not recorded at the county court house. While this is being done in many areas of the U.S. it is not a sound idea because, if the lender finds out about the sale, they have the legal right to immediately call the mortgage note due and payable.

A much better way to avoid getting around the due on sale clause for creative financing purposes is to go  directly to the lender and negotiate a weighted average or blended rate interest rate. That is, average the seller's existing interest rate with the lender's market rate to satisfy all parties to the transaction. The lender  will  end up with a higher interest rate and payment than they had on the previous mortgage and they will not have to go out and seek another borrower, as the seller furnishes the interested borrower/buyer. The seller can sell his house because the loan to be assumed is several percent lower than new loan market rates are at the time. The buyer feels that he is getting a bargain as he gets the house he wants to buy at below market interest rates. Remember, all that it takes to make this transaction work is an agreement between the lender and new borrower. The lender will then waive the "due on sale clause" in favor of the new Interest rate and higher payments. (Get the waiver in writing). At the time of this writing over 60% of all mortgage lenders in  the  U.S. had some type of blended rate system that could be used.

If we carry the above assumption sale one step further, it Is possible for conventional loans containing  due on sale clauses to be creatively  financed  using  contract  for  deeds, wraparounds, lease  purchases,  second  mortgages  and  other  sales  vehicles.  The  key however, is negotiating with the lender, as they can and will allow the transfer of ownership in return  for higher interest rates and higher monthly payments. The  seller could agree to provide a large second mortgage (100.000 wrap) to a buyer at a favorable Interest rate and agree to allow the lender to raise the Interest on his comparatively small first mortgage, in return for not exercising the due on sale clause. The results would be, the buyer would obtain a large second mortgage with below market interest rates from the seller. The seller would collect more money from the buyer each month than he would have to pay the 1st mortgage lender, giving him a positive cash flow. The lender would collect higher payments and a larger interest rate without having to reprocess another loan or buyer. Most lenders will consider this compromise as long as the new interest rate exceeds their cost of funds.


                                    LOAN BALANCE   INTEREST RATE    MORTGAGE PAYMENT
EXISTING LOAN             $100,000                      8.0%                                $734
MARKET RATE               $100,000                      10.0%                              $878
BLENDED RATE             $100,000                       9.0%                               $805

*The new buyer would take over the existing loan with payments of $805, a savings of $73 per month compared to new financing.


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