Foreclosing on a juinor lien and entering into legal title that way does not necessarily preclude you from being affected by the due on sale clause that exists in the 1st lien against the property.
We just had this happen on a property in North Carolina where the underlying lienholder could have elected to enforce their DOS provision.
It would be wise to make certain that you get clearance from that underlhing lienholder that they wil not enforce the DOS if you foreclose or take a deed in lieu and enter into title as long as you make certain they get paid.
Recently it occurred to me that bypassing the due on sale clause might be as simple as getting a second trust deed from a seller and a deed-in-lieu of foreclosure which would be recorded in rapid succession.
Does anyone have any experience with foreclosing/deeds-in-lieu that might warn me of potential pitfalls ahead?
Exemptions to the DOS clause - Posted by John Behle
Posted by John Behle on February 08, 2000 at 12:37:56:
One of the specific exemptions to the DOS clause is a junior lien holder protecting their position. The Garn-St. Germain bill specifically mentions this, yet the Federal Home Loan Bank Board has essentially said “so what”.
I’ve done it. They call it a “Friendly foreclosure” and we have had no problems. We walk into the lender’s office and tell them the situation and they say no problem. That’s our experience so far.
Could they call the loan? Questionable. I don’t think they have the right based on the “bill”, but it’s not something I want to fight about. So, I have a “worst case scenario” plan in case they did call it. There are no crimes or penalties associated with it. There are no “DOS police” and the worst thing that could happen is they call the loan and you have to refinance.
Some real estate agents may think it is some kind of crime. Understand they have been warned and even terrorized by the “Real Estate Division” over this and in some cases their license could be in jeopardy for not following procedures as they’ve been told. That also applies to “over-mortgaging” properties.
Does a wrap violate the DOS. Sure. Any sale or transfer of title or any part of it can. You always have to be prepared for that contingency.
Now as I mentioned, a junior lienholder taking title through foreclosure or a deed in lieu of foreclosure is exempt (with differing opinions). Yet, if the lender is agreeable and you take title - it does not negate the clause - it only allows that one transfer.
Meaning, that you now have title - but the clause is still in place and a sale or transfer by you would trigger the clause.