Why The “Due on Sale Clause” Might Be a Bigger Deal Now

Cam Dunlap here today to talk about the due on sale clause in real estate.

Recently, a great question from one of my Inner Circle clients came my way.

Barbara asked:

“If you do an assignment with seller financing on some kind of wrap-around, is the seller’s institutional lender willing to work with you and accept your payments or will they call the loan due?”

Good question!

The Due on Sale Clause: What is it?

So, in the case of a wrap-around where the underlying loan remains, you may or may not actually get the deed. 

The seller might say, “Well, I’ll do a wrap-around. I’m going to take a payment that’s greater than what I owe on my $100,000 mortgage and that encompasses the other $50k, which is my equity, but I’m not going to deed the property to you. We’ll do it on a lease option… or an agreement for deed… or a land contract… or an all-inclusive trust deed.”

So, generally speaking, in the case of a wrap-around, the seller may or may not transfer title. 

If the title is transferred and the loan is not paid off, the seller/borrower is technically in violation of the “Due on Sale Clause.”

Basically, the Due on Sale Clause is a big, scary feature that’s there for a good reason: The lender wants to protect their interests. If the deed transfers to somebody else, without the loan being paid, they can call the whole loan due.

My Experience With Due On Sale

In my experience, I have never seen a lender call a loan due on me. Lenders just don’t often, if ever, exercise it, historically. There’s really no track record of actually calling those loans due. 

So, real estate investors are used to disregarding it and saying, “That’s a risk I’m willing to take, because it’s such a small risk.”

Now, I know of one scenario where an acquaintance of mine did have a lender call the loan due, but it’s a freak occurrence because the only way they can actually do that without your consent — meaning, without you capitulating and saying, “Fine, I’ll pay off the loan,” — is to foreclose. 

Foreclosure is their only remedy. And that’s expensive and time-consuming. And then they have a non-performing asset, which affects their ability to lend based on ratios that are set by the Fed.

So, any time a lender threatens that you’re in violation of the Due on Sale Clause and demands payment for the loan in full in 90 days… ignore it. Because the chances of them actually following through on that are close to zero. 

So, again, historically, this has not been an issue.

However, we’re in different times these days… I’ll explain…

This is interesting… 

I was teaching at an event years ago, and there was a guy there who ran the foreclosure team for SunTrust Bank, which is a huge southern bank that recently merged with BB&T to become Truist.


I asked him about the bank’s policies and procedures with regard to the Due on Sale Clause: “What are the chances you would actually follow through on a threat and foreclose?”

And he said: “Almost never. Except in an environment where the face rate on the loan is very low and the current rates that we’re lending at is much higher.”

What he means is the delta between the face rate on the loan — what’s written into the contract and what they could lend the money for if they were to recover that money and put it back out by selling them off on the secondary market or perhaps hold it in their portfolios. 

All of that aside…

“When the delta between the face rate and the current rates is wide, then we might,” is what he said.

And I remember thinking that’s a good lesson for me, I’m going to file that one away. I actually haven’t thought about this in quite a while… but as you know, it just so happens we’re in that environment right now. 

Again, he said the only time they’d call that loan is if interest rates were higher than the fixed interest rate on that loan, significantly enough that the delta between the two is an incentive for the lender to call it due.

In other words, if the lender can reclaim the funds and lend them out instantly at a higher rate — they’re likely to. 

Now, with interest rates significantly high these days, the Due on Sale Clause is potentially a bigger threat for investors who think that it’s usually not a big deal. Because the lender could call the loan and put it back out at a much higher rate… rates like we’re experiencing now. 

The higher the rate, obviously, the more the lender will make.

See, a lender can deny a loan for any doggone reason they want. But what they’re really doing is resetting the rate, because you’re locked in at a rate much lower than the market, so they’re adjusting to overcome that.

So right now, you might see a lender follow through on that Due on Sale Clause threat if they’re confident they could put the money out at a much higher rate.

Final thoughts…

I should point out that I’m not saying that the Due on Sale Clause is an imminently bigger threat than it’s ever been.

But I am saying that you’d be wise to follow my lead in being more cautious and aware of entering transactions in which the Due on Sale Clause is a factor.

What has your experience been with the Due on Sale Clause? Let me know in the comments!


Cameron Dunlap

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5 thoughts on “Why The “Due on Sale Clause” Might Be a Bigger Deal Now

Cam, Thanks for the info. It will come in handy!

If what You and others are saying … that their is a more than normal period of foreclosures on the horizon … then wouldn’t be LESS likely they would foreclose on an up to date preforming asset ?

With all due respect, I don’t need the title to acquire 100% fee simple bundle of rights of ownership. My group did 500+ SubTos’ years ago.. all wrong. We put both ourselves, the seller and our lessees at risk. We don’t do that no-mo!

If I transfer the title to a (certain kind of) Mutually Directed, Multi-Beneficiary Trust, there is no violation of the Garn St Germain Act / DOS Clause or Dodd Frank because, as you mentioned, there is no title transfer. The Title is transferred to a licensed/bonded professional non-profit Trustee which is fully and compliant in all 50 states. We then perform somewhat of a sandwich lease or lease option by assigning Beneficiary Rights to an occupant who lives in the house, makes all mortgage payments, taxes, insurance, maintenance and repairs. They can also write off the mortgage interest which means we can get higher ‘rents’.

There are myriad other legal benefits that go far beyond this style of transfer other than simply legally avoiding the DOS.

For legal protection, imagine if my ‘seller’ gets liens, judgements, garnishments, IRS tax liens, a division of property judgement in a divorce, etc… or goes out and leveraged the property without me or my sub-lessee knowing about it?

In our trusts, none of these issues can attach to the property because once inside our trust, Realty is converted to Personaty (personal property) and as such, cannot be attached to judgements or liens or even IRS tax liens.

One more quick benefit is… when title is held in trust, there is no need for Judicial Foreclosure (because the lessee is leasing interest in a trust, not in real property, thus they do not have equitable interest in real estate).

Yeah yeah I know… that would never hold up in court right? Wrong… it’s held up 100’s of times over the 35 years and @$2Billion in properties we’ve done.

I always here investors / teachers say “… that sounds complicated, or expensive.”

It’s neither.

We’ve created a Parallel Economy not depended on, or influenced by, the government and conforming lender’s rules… or the FED (% rates).

Hope that helps.

With the fact all mortgage companies have had such a significant drop in business/revenue over the last year because of the drop in orgination volume, do you think a bank will call a loan due with higher rates knowing the chance of them being able to lend out that money is a lot less now? I understand rates are higher and you can technically loan money out at a higher rate now but the the chances of that money being loaned out is a lot less in this current market also. I don’t think a bank will call loans due in these cases because it’s better to have 2.5-3.5% guranteed rate of interest income then hoping that you can possibly get 6.5-7% interest in today’s market because you would be risking a loss of that guranteed interest income you have currently with today’s market. I think if rates drop to the 4-5% range, more buyers will come back in the market and this could be true but with most rates being 6-7% now, I don’t think the demand for mortgages is worth most banks loosing out on guranteed interest income to try to get a higher rate on funds they may not be even able to lend out currently.

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