Understanding Due On Sale Clause
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 737
By Ilyce R. Glink and Samuel J. Tamkin
Summary: Mortgage lenders often include a
due on sale clause in the mortgage agreement. A ThinkGlink reader would like
to transfer his home to an LLC but is concerned the due on sale clause will
be invoked. Ilyce and Sam explains why mortgage companies use this clause in
Q: What’s my best option when it comes to transferring a property to
a limited liability corporation (LLC) and avoiding the due on sale clause?
(article continues below useful links)
A: A due on sale clause is the provision in a mortgage that basically states
that if the owner of the property that has a mortgage on it, sells the home,
that lender has the right to call the loan and demand repayment of the loan
The idea behind the due on sale clause is that the lender was willing to give
the loan to a specific owner of specific piece of property and if that owner
sells the property, the lender is entitled to decide whether it wants to continue
with the loan arrangement.
In the residential marketplace, lenders can’t trigger the due on sale
clause under certain circumstances. These circumstances involve the death of
one of the owners, when there is a conveyance from one spouse to another, and
certain other family arrangements.
In your case, you want to convey a property to an LLC. Let’s assume that
you’re the sole member of the LLC. In other words, you are the owner of
While you haven’t indicated why you want to transfer title to the property
to an LLC, many people transfer properties to LLCs either for liability purposes
or for flexibility in their investment strategies with other people. If you’re
transferring the property to an LLC for these or other reasons, and the property
will generally be financed through a residential lender, you need to keep in
mind that many, if not most, residential lenders will require you to have the
property in your own name to finance and refinance the property.
You may encounter a residential lender that will tell you that you can transfer
the title to the property to an LLC after you refinance but they will not modify
the documents to eliminate the due on sale clause.
If your property is commercial and the loan documents contain a standard due
and sale clause, any transfer can trigger the due on sale clause and give the
lender the right to trigger it and call the loan. But if your loan is a commercial
loan, you should be able to talk to the commercial lender and get its consent
to your transfer.
If your property is a residential property – even if it’s an investment
property – but the servicer of the loan is a national residential mortgage
servicing company, you may have a hard time getting the servicer to consent
to your proposed transfer to the LLC.
At that point, you’ll have two choices: You can transfer the property
and risk that the lender will decide to call the loan, or you can wait until
you need to refinance the property and then transfer the property to an LLC
as part of the transaction.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com