Due on Sale Foreclosure
Suppose someone is facing foreclosure, and I have enough cash to reinstate their loan. But not enough to pay off their loan. We come to an agreement for me to buy the house, assume their loan, immediately resell the house, and share the the net gain from the equity. Of course that means I have to be able to pay the mortgage payments from the time I buy the house to the time I sell it.
But the lender won't give their approval for me to assume of the loan. Of course they have a due on sale clause. And the loan is for a lower interest rate than they could get today, so the lender is motivated to call the loan and re-lend the money at today's rate.
I buy the house anyway, and one minute later the lender calls the loan. I don't have the money to pay it off. The lender returns any mortgage payments on the loan I attempt to pay.
So my question is, what happens next? Do I get the standard foreclosure timeline? 60 days of being in default before the Notice of Default (Lis Pendens), then another 30 days before the Notice of Trustee Sale, then another 120 days before the auction date? Totaling 210 days from the day they call the loan to the auction date?
And if I can sell the house on the normal real estate market, through a real estate agent, and close the sale before the auction date, for far more than enough money to pay off the loan, is everything good? Aside from the risk of not selling in time and losing the home and having a foreclosure on my record, is there some factor I'm missing that won't allow this to work?
But the lender won't give their approval for me to assume of the loan. Of course they have a due on sale clause. And the loan is for a lower interest rate than they could get today, so the lender is motivated to call the loan and re-lend the money at today's rate.
I buy the house anyway, and one minute later the lender calls the loan. I don't have the money to pay it off. The lender returns any mortgage payments on the loan I attempt to pay.
So my question is, what happens next? Do I get the standard foreclosure timeline? 60 days of being in default before the Notice of Default (Lis Pendens), then another 30 days before the Notice of Trustee Sale, then another 120 days before the auction date? Totaling 210 days from the day they call the loan to the auction date?
And if I can sell the house on the normal real estate market, through a real estate agent, and close the sale before the auction date, for far more than enough money to pay off the loan, is everything good? Aside from the risk of not selling in time and losing the home and having a foreclosure on my record, is there some factor I'm missing that won't allow this to work?
Comments
As a practical matter, it is unlikely that the loan would be called and foreclosed before you could sell the house on the open market (for presumably a market rate or below). Of course, that may vary, especially in the current market where prices are coming down and houses are taking longer to sell.
As mentioned in the article, the due on sale clause is a lender option. It is not mandatory, and as long as you aren't actively concealing the sale from the lender, there is an ethical line that is most likely not crossed. You may even have the legal defense of laches if you violate the clause, proactively inform the lender, and the lender does not call the loan in a timely manner.
But the devil is always in the details. Did you know that according to the Code of Federal Regulations, a lease of more than three years at a time is a per se sale of the property for "due on sale" clause purposes? See 1(b)(iv): https://law.cornell.edu/cfr/text/12/591.5. I didn't until 5 minutes ago.
If you're really going to do this, probably best to consult with a lawyer beforehand (as opposed to advice from randos on the internet).
Assuming the homeowner would be signing a warranty deed, transferring title to you, unfortunately the deed of trust signed by the owner is still owed by the original owner. This is arguably not in the best interest of the homeowner. Since homeowners in financial distress were taken advantage of during the last meltdown 10 years ago, we have passed WA state consumer protection laws that target the specific practice you're describing: Preying on people in financial distress.
Stop. Do not pass go, do not collect $200.
Open up your wallet and hire a competent REAL ESTATE attorney licensed to practice law in WA State to advise you from this point forward.