Due On Sale (DOS) Clause Exemptions
I was on the Fannie Mae website and found DOS clause exemptions. The following DOS exemption clause in particular peaked my interest:
"The creation of a subordinate lien, as long as it does not relate to a transfer of occupancy rights"
Does this mean that if I create a lien on my investment property (for example, borrow $500 from my brother, with that $500 loan secured by my investment property, and record that lien), I can transfer my investment property into an LLC?
The other DOS clause exemptions are as follows:
We do not require the servicer to enforce the due-on-sale (or transfer) provision for certain types of transfers or related transactions. Generally, the servicer must process these exempt transactions without reviewing or approving the terms of the transfer:
A transfer of the property to the surviving party on the death of a joint tenant or a tenant by the entirety;
A transfer of the property to a junior lienholder as the result of a foreclosure or acceptance of a deed-in-lieu of foreclosure for the subordinate mortgage;
A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to a relative of a deceased borrower (or, in the case of an inter vivos revocable trust borrower, to a relative of the individual who established the trust), as long as the transferee will occupy the property;
A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to the spouse, child(ren), parent(s), brother(s) or sister(s), grandparent(s), or grandchild(ren) of the borrower (or, in the case of an inter vivos revocable trust borrower, of the individual who established the trust), as long as the transferee will occupy the property;
A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to a spouse of the borrower (or, in the case of an inter vivos revocable trust borrower, of the individual who established the trust) under a divorce decree or legal separation agreement or from an incidental property settlement agreement, as long as the transferee will occupy the property;
A transfer of a property that is jointly owned by unrelated co-borrowers from one of the borrowers to the other, as long as the borrower who is gaining full ownership of the property will continue to occupy it and the transfer occurs after at least 12 months have elapsed since the mortgage was closed;
A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) into an inter vivos trust (or, if the borrower is an inter vivos revocable trust, into a new trust), so long as the borrower (or the individual who established the original inter vivos revocable trust) will be the beneficiary of the trust and the occupant of the property;
The granting of a leasehold interest that has a term of three or fewer years and does not provide an option to purchase the property. If the lease has a renewal option that would allow the term to extend beyond three years, this exemption does not apply;
The creation of a subordinate lien, as long as it does not relate to a transfer of occupancy rights; or
The creation of a purchase money security interest for household appliances.
Giving your brother a second mortgage for $500 and transferring title to your LLC are two separate and independent events.
The first does not trigger the DOS, the second could.
A transfer of the property into an inter vivos trust, so long as the borrower will be the beneficiary of the trust, does not trigger the DOS. Transfer the property to the trust, then assign your beneficial interest in the trust to your single member LLC. No need to create a second mortgage which you will have to repay to your brother.
I did a little more research, and in the Fannie Mae "1-4 FAMILY RIDER" (which many borrowers are required to sign), it states that you are not even allowed to have a 2nd mortgage/equity line without the lenders permission:
"C. SUBORDINATE LIENS. Except as permitted by federal law, Borrower shall not allow any lien inferior
to the Security Instrument to be perfected against the Property without Lender’s prior written permission."
If the lender does give you written permission to obtain a 2nd mortgage/equity line, I think that you can get around the DOS clause, since the Fannie Mae website says the following about the DOS clause:
We do not require the servicer to enforce the due-on-sale (or transfer) provision for certain types of transfers or related transactions. Generally, the servicer must process these exempt transactions without reviewing or approving the terms of the transfer:
"The creation of a subordinate lien, as long as it does not relate to a transfer of occupancy rights".
I think that means that if 1) You get lenders permission to obtain a 2nd mortgage/equity line; 2) the lender will not be required to call the loan, and why would they if you are paying on time.
Do you think my thoughts are logical?