What are Due on Sale Clauses and Transferable Mortgages?
Typically, when a St. Louis seller finally sells their house they use the proceeds of the loan to pay off their mortgage. It seems like the natural process of what should happen, but many homeowners don’t understand that is what has to happen because of the Due on Sale Clause within their mortgage.
What is a Due on Sale Clause?
The Due on Sale Clause is one type of an acceleration clause. Usually the acceleration clause is used to protect the lender if the homeowner fails to meet the terms of their loan. That means if they aren’t making their payments on time or have failed to keep insurance on their St. Louis house the lender is able to demand the total balance of the loan from them. Typically this is payable within 30 days.
However, the Due on Sale Clause is different. This clause is a part of the closing process when selling a St. Louis home. The clause exists to attach the loan to one house and one homeowner. That means when the homeowner is ready to move they can’t simply have the buyer take over the mortgage. Instead, they need to payoff the mortgage and the buyer obtains their own new mortgage.
This clause allows lenders to look at both the St. Louis property and the individual before they loan money to someone. If you are allowed to simply hand off your mortgage to another person the lender would have no way of knowing how risky of a loan they now have. This stops the lender from taking on a loan that they would normally not have given out to someone.
Do all loans have this clause?
There are actually mortgage that do not include the due on sale clause. These types of loans are through the USDA, VA, and FHA. Since they do not have this clause in place the mortgages could actually be transferred to another party. The new buyer actually assumes the mortgage from the seller. This means that they take over the existing loan.
However, there is a catch. The lender will still need to verify that the new buyer meets certain requirements for the loan. Many times, when loans are transferred it is due to a death or a divorce and not simply because someone is trying to sell their St. Louis house.
Why would a St. Louis buyer want to assume a mortgage?
One of the main reasons that a buyer would want to assume a St. Louis mortgage instead of taking over a new mortgage would be due to low interest rates. If the current mortgage is already written with a low rate and current rates are much higher, it benefits the buyer to assume the old loan and rate.
When you are obtaining a mortgage make sure you understand all of the clauses and what they mean for you. If you have questions about your existing loan or one you are obtaining contact your mortgage lender. If you are interested in assuming a mortgage you will need to speak with the lender to see if the option exists on the loan.