Selling A Home And The Due On Sale Clause

Q: I would like to know if it is legal to sell a house that still has a balloon payment due.

My mother sold her house in 2002. The purchaser paid off the existing mortgage and my mother financed the rest, which was $18,000 and which was due the next year. They now pay $100 a month on the balloon loan.

The buyers sold the house without notifying my mother or paying off their balloon loan. Was it legal for them to sell the house and not pay her the rest of what was owed?

A: To answer your question, you have to understand that the ownership of a home and the obligation to pay a debt on a mortgage are generally independent of each other.

For example, you can own a piece of property and that property could be sold and resold multiple times while the mortgage – the debt – on the property remains in place. You can even create a mortgage that limits responsibility for the repayment of the debt solely on the value of the property.

Having said that, most mortgages have what is known as a “due on sale clause.” The due on sale clause states that if the owner that has the obligation to repay the amount owed on the debt if the property is sold, and the lender has the right to accelerate all payments due under the mortgage debt.

In addition to the due on sale clause in mortgages, there are other ways of setting up the transaction that would require a buyer with seller financing to pay the lender back and prevent the buyer from selling the property without that repayments.

Let’s talk about your loan documents. Have you reviewed your mother’s loan documents to see if she had a due on sale clause built into them If you find out that the documents have a due on sale clause, you can notify the original owner of the property – the person that signed the note promising to repay the loan – and the current owner of the property and demand repayment on the debt.

As a side note, a commonly used note and mortgage on residential property provide that the borrower will repay the debt over time. When the borrower pays off that debt over time, at the end of the term of the note, if the borrower has made all the required payments, the borrower will have paid everything due under the note.

The note is the document in which the borrower promises to repay money and the mortgage is the document that the lender records against the property to secure the debt. If the borrower fails to pay the amount owed on the note, the lender can foreclose on the property, sell the property and use the money from the sale of the property to satisfy what is owed on the note.

A balloon note is somewhat different. A borrower pays money as required under the note, but when the note is due, the borrower still has a significant balance due. In your case, the original balance of the loan might have been $20,000 and over time was paid a bit but at the time the note was due, the borrower would owe a “balloon” payment of $18,000.

Depending on how your mom and her buyer structured the transaction, the buyer could have sold the property without penalty if the loan documents did not have a due on sale clause. But the lien would remain on the property and the subsequent buyer would have to continue making payments on that debt or risk losing the property to your mom in foreclosure. You should review the documents and determine whether you can accelerate the payments and call the loan due.

For more information, please consult with a real estate attorney in your area.