Question: I always read and usually agree with the advice you provide in your column. However it has been my experience as a lawyer that quitclaim deeds often result in unpleasant surprises. So your advice in your last column suggesting that “D.G. of Everett” should contact an attorney to help prepare a quitclaim deed is good advice.
However, you should advise D.G. that transferring title to the property by quitclaim deed has the risk of triggering the due-on-sale provision of the owner’s mortgage.
It has been my experience that lenders do not trigger the clause when the payments keep coming and interest rates are in the ball park of the existing loan. But when interest rates rise, or the new owner has trouble making the payments, the lender has an easy out if the due-on-sale clause, which is actually a due-on-transfer clause is violated.
D.G. should be informed of that risk before making large investments in the property because it is clear that D.G. would not be able to refinance under the facts as stated.
B.K.
Answer: You are correct, any transfer of title can trigger the due-on-sale clause of a mortgage. But as you mentioned, that rarely happens in the real world.
Real estate investors sometimes take title to property subject to the existing mortgage, which means the underlying loan remains in place and the investor pays the seller for the equity in the property.
For example, if an investor bought a house for $300,000 subject to a $250,000 mortgage, the investor would pay the seller $50,000 for the equity and take over the payments on the existing mortgage. The $50,000 payment for the equity could be made in cash, a second mortgage carried by the sellers or a combination of the two.
The main risk associated with buying a home subject to an existing mortgage is the due-on-sale clause, which gives the lender the right to accelerate the loan — in other words, call the entire loan balance due and payable — as soon as it discovers that the property has been sold.
But the reality is that many buyers take title to property subject to an existing mortgage without running afoul of the due-on-sale clause. As long as the lender receives the full mortgage payment on time each month, it’s unlikely that anything will happen.
Lenders do not scour the county property records every day looking for title transfers that might trigger the due-on-sale clause. Instead, they usually find out about a property transfer indirectly, such as receiving a notification from the insurance company of a new name on the homeowner’s policy. So one way to avoid that risk is to keep the insurance policy in the seller’s name after the title transfer.
Because of the risks involved, a purchase contract that is subject to an existing mortgage should include specific language as to what the buyer and seller will do if the lender exercises the due-on-sale clause at any time in the future.
There are serious financial risks involved in this type of transaction and you should have a plan in place in case the worst-case scenario occurs. But again, in the real world, as long as the mortgage is paid on time each month, it is very unlikely that you will have to worry about the due-on-sale clause being exercised.
However, if the mortgage becomes delinquent, the lender can foreclose on the loan and take the property away from you. So it is critical to ensure that the mortgage payments are made on time each and every month.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.
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