Due On Sale Clause

A due-on-sale clause helps protect the lender, or mortgage holder, from the risk that the ownership may be transferred to a new owner upon sale of the property.

Because of the due-on-sale clause, when you sell your house you cannot transfer your mortgage to the buyer. You must use the sale proceeds to pay off your mortgage, and the buyer must obtain a new mortgage. If it were not for the due-on-sale clause, the mortgage could be assumed by buyers who might not otherwise qualify for the loan.

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause.

The same is true if the owner transfers the property to his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.

Owner Financing

Owner financing also known as "creative financing" or "seller financing" is financing the purchase directly through the owner or entity selling it.

Owner financing often occurs when the prospective buyer cannot obtain funding through a conventional mortgage lender, or is unwilling to pay the prevailing market interest rates. Additionally, the seller may agree to owner financing if he or she is having difficulty selling the property.

Owner financing may only cover part of the purchase price, with a smaller bank loan making up the difference.

Owner financing is common in a buyer's market. In order to protect his or her own interests, the seller may require a higher down payment than a mortgage lender would. Down payments of 20% or more are not uncommon in owner financing.

The deed to the property is usually not transferred to the buyer until all of the payments have been made, but because no institutional lenders are involved, the overall terms of financing are much more negotiable, and can be set up to provide benefits to both the seller and the buyer.

The buyer saves on points and closing costs, while the seller can obtain monthly cash flows that provide a better return than fixed-income investments.