A Mortgage Due on Sale Clause

Can you do the owner finance or lease for someone else if you still owe a mortgage on the property?

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- Zsebe J. - Jun 5, 2014 at 8:19PM
1 Answer

I'm not sure what you mean but I'm going to suppose that you mean, can you sell the home to someone else, or lease it to someone else, when you have a mortgage debt against the same property.

The short answer is No.

The longer answer is: All mortgages contain a due on sale clause. This language permits the lender (bank) to require immediate payment of the entire amount owed on the loan (the bank has the option, not the obligation) if any interest in the land is transferred to anyone who did not sign the mortgage (called a 'third party'). A sale to someone else would certainly qualify as a transfer of an interest in land to a third party, and would trigger the bank's right to demand payment of the entire loan balance. A lease to a third party potentially results the same way, as a lease grants 'exclusive possession' to the tenant; this, too, is an interest in land.

In the event you did either thing, you'd have to let the lender know that this had happened. If you did not tell the lender, you'd be defrauding the lender, which is a federal crime.

Also, if you do either, the home is no longer insured under your homeowner's insurance policy, which could possibly have catastrophic results in the event of a fire or a lightning strike or some other loss to the property.