digest
Short Summary
Main recommendation: Investors using creative financing, such as subject-to deals or transferring title to an LLC, should understand that the due-on-sale clause is now being enforced more often, especially as rising rates give lenders a financial incentive to call loans. The hosts argue that buyers should get guidance from a mortgage professional before committing to these strategies, because they can block a clean exit later.
Key Points
- Lenders have historically ignored the due-on-sale clause as long as payments were made, but the hosts say their clients are seeing investigations rather than simple ignoring.
- Investigations are often triggered when a primary residence is listed for rent shortly after purchase, or when title is transferred without lender approval.
- Rising interest rates may push lenders to call low-rate loans (examples given were around 3% to 4.5%) so they can refinance borrowers at higher rates; the hosts speculate this could happen, comparing it to banks facing losses on bonds after the Silicon Valley Bank failure.
- Title records are public through the county assessor's office, so lenders can easily see who owns a property and whether it was transferred.
- Subordinate loans such as HELOCs carry more risk for lenders, so existing first-position lienholders may resist or complicate later financing.
Details Worth Noting
- Concrete instructions:
- Before buying a primary residence with a conventional loan, understand the occupancy requirement: the hosts say you have 60 days to move in and generally must live there for the first 12 months.
- Do not transfer title to an LLC or to another individual while keeping the mortgage in your name, since this can trigger a due-on-sale call.
- If you may later refinance into an investment loan, expect that a called loan could require about 20% down, meaning roughly 15% more cash beyond a 5% down payment, to bring the loan current.
- Before using subject-to, seller financing, or other creative financing, consult a mortgage professional about your exit strategy, since refinancing out with a 30-year fixed mortgage is often the key step, as in the BRRRR method.
- Learn the risks and rewards of creative financing first, and be aware that combining conventional and seller financing often does not work well together.
- David says he expects the Fed to keep raising rates for the next several years, which could make loan calls more likely.
- Subject-to deals may leave you stuck paying the seller's loan for its remaining term if no clean exit exists.
Bottom Line
Creative financing strategies can be attractive, but rising rates and public title records mean lenders are now more likely to check occupancy and ownership and call loans, so buyers should plan their exit before they enter a deal.
