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Cindy Said:

Under what circumstances outside of a home owner's control (ie, lender bankruptcy) may a mortgage be called?

We Answered:

Due-on-Sale-Clause - A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

One trend in the mortgage industry has been the virtual disappearance of assumable mortgages. This is unfortunate for homebuyers, since an assumable mortgage allows them to retain a below-market interest rate and avoid many closing costs, such as a credit check and appraisal. Except for certain FHA and VA loans, almost all mortgages now contain a “due-on-sale” clause which require that the mortgage be paid if there is a change in ownership.

Typical “due-on-sale” language states that, “the Lender may, at its option, declare immediately due and payable all sums secured by the Mortgage upon the sale or transfer, without the Lender’s prior written consent, of all or any part of the Real Property, or any interest in the Real Property.” A reading of the language shows that the term, “due-on-sale” is misleading. In fact, the mortgage may be called in if there is any transfer of any interest in the real estate, and not just a sale of the property.

Some examples may show how far reaching the “due-on-sale” clause can be. The most obvious example is a land contract, also known as a Contract for Deed. Since a Contract for Deed passes equitable title to a potential buyer, such a contract is a violation of the “due-on-sale" clause, even though the seller retains legal title. This entitles the Lender to call in their mortgage and demand payment in full.

It is possible that even a long term Lease will allow the Lender to accelerate their mortgage, especially if the Lease contains an option to purchase. There is some case law indicating that any lease longer than three years will trigger the “due-on-sale” clause. But any Lease that contains an option to purchase will be sufficient to call in the loan if it contains an option to purchase the property, regardless of the length of the Lease.

For tax and probate purposes, some people transfer their property into a Land Trust, also know as a Living Trust. These Trusts do not trigger the “due-on-sale” clause, if the current owners are also the sole beneficiaries of the trust. However, if you transfer your home into a Land Trust with your children as beneficiaries, the Lender may call in the loan. Also, the exemption for Land Trust only applies to owner-occupied homes, and no investment property.

What if one spouse signs a Quit Claim Deed to remove their name from the Deed as the result of a divorce settlement? This is certainly a transfer in ownership. However, federal law prevents the Lender from demanding immediate repayment of their loan simply because two joint co-signors get a divorce. However, the spouse who signs the Quit Claim Deed still remains liable on the Mortgage, even though their name is no longer on the Deed.

Lenders are entitled to know to whom they are loaning money, and to set terms and conditions. Moreover, the “due-on-sale” clause is now required by various federal agencies. While such a clause may hinder some real estate deals, they makes solid business sense.

Basically the due on sale clause is a statement within the deed of trust or mortgage depending of the state you reside that says that if the the person who takes out the mortgage decides to sell the house then the mortgage or deed of trust given for collateral has to be paid in full. Note the due on sale clause is rarely called into play when transfering title or ownership by mortgage companies.

Due On Sale Clause is on almost every mortgage note.

Renee Said:

my mortgage lender filed bankruptcy, what steps do i need to take? they never sent me any sort of communicatio

We Answered:

Call them and see if there's any kind of recording concerning the bankruptcy and how it will affect the company. Don't assume that you don't have to continue to make payments. Airlines file bankruptcies all the time and continue to do business. The bankruptcy court may continue to allow them to operate while they negotiate with their creditors. Usually if a financial concern is really in bad shape, the state will appoint a receiver to take over the business while the company is either dissolved or sold. Another company may purchase your lender.

Call the state regulatory agency that oversees banking and financial institutions and see what the status is for your lender. They should have some information. Continue to make your payments; you are not released of your obligation to the bank.

Carolyn Said:

I Filed Bankruptcy Over 7 Years Ago, Will Any Lender Extend A Mortgage?

We Answered:

Absolutely, as long as you have a good credit history since and have repaid obligations on time. Go for it!! Now's the best time to buy a house, it's a buyer's market!!

Herman Said:

I received a Motion for Order Allowing Secured Proof Of Claim To Be Filed Out Of Time From my mortgage lender?

We Answered:

You cannot "elect" NOT to "file against [your] mortgage lender" when you file bankruptcy. You are required by law to list ALL debts and ALL assets. You can't leave any out.

Your mortgage lender probably checks your credit reports periodically and found out that you filed bankruptcy. Your mortgage lender knows that you aren't allowed to leave them off the bankruptcy schedules. They are requesting to file a (routine) proof of claim in your bankruptcy case, which they would have filed timely if they'd received notice of your bankruptcy (which they were entitled to receive). You are lucky they aren't asking to have you prosecuted for bankruptcy fraud.

Additional Info:

I must be confused about what you mean when you say, "I didnt file againt my mortgage lender." You don't "file against" ANY particular creditor. You either file bankruptcy or you don't. ALL creditors MUST be included in your schedules and ALL assets MUST be included in your schedules. If you did this, meaning the house appeared on schedules A and C and the mortgage appeared on Schedule D and the mortgage holder appeared on the creditor matrix, then file an objection to the creditor's Motion.