QUESTION: After having resided in a house that I own for several years, I have been renting it out for the past two and one-half years. Recently, I looked at the deed of trust on the property, and I have questions about a clause. The clause states:
Transfer of property; assumption. If all or any part of the property or an interest therein is sold or transferred by Borrower without Lender's prior written consent, excluding (a) .. (b) .. (c) .. (d) the grant of any leasehold interest of three years or less not containing an option to purchase, lender may at lender's option, declare all of the sums secured by the deed of trust to be immediately due and payable.
Does this mean that if I lease the property out for more than three years, the lender will have the right to call back the loan? If I move back into the house before the end of the third year, live there for a year, and then rent the house out again, will this three-year lease limitation be renewed?
ANSWER: I was delighted to receive this question from a reader. The message that this column has been preaching for many years seems to be making its mark on the housing consumer. This message, oversimplified, always has been to read your documents and legal contracts carefully and to take steps earlier to prevent future crisis and misunderstandings. This is an element of what I call "preventing law," and should be used by all consumers.
You have read your deed of trust and anticipated a future problem. The language quoted above comes from the boilerplate clauses found in most standard deeds of trust on loans made by commercial lenders in this country. In the trade, that deed of trust is known as the uniform FNMA/FHLMC deed of trust.
The paragraph is also known as the "due-on-sale clause" on which there has been much litigation -- including a recent Supreme Court case -- and much discussion. Congress is deliberating on how best to solve a very serious dilemma. On the one hand, lenders do not want to permit assumptions at the old mortgage rates (which can range between 7 and 12 percent) but, on the other hand, consumer borrowers will not -- and cannot -- afford to buy houses at the going market rate, which is hovering around 15 percent.
Technically speaking, if you lease your property for more than three years, this can be considered a "transfer by borrower," which could give the lender the opportunity to accelerate your mortgage in full. Although most lenders probably will not want to exercise this option, the fact remains that they have the right to do so. Clearly, if you are sitting with a 7 percent loan, the lender will be tempted to call your entire loan due.
Although the recent Supreme Court case did not rule on your type of question, the fact remains that many lenders have received moral and legal support as a result of the court case. As you may recall, the Supreme Court upheld the validity of the so-called "due-on-sale clause" as enforced by the Federal Home Loan Bank Board.
Because you have been renting your property for less than three years, you should exercise a little "preventive law." Confront the lender directly and ask what his position will be if you do lease the property for more than three years. Keep in mind the language in the clause quoted earlier, which specifically permits such long-term leases with the "lender's prior written consent."
I suspect that your lender probably will go along with the rental idea, but make sure that you have this in writing before the three years are up.
Here's a suggestion on how to handle the written-consent issue. Write the lender, spelling out your request. Then add the following at the end of your letter:
"Unless I hear from you to the contrary within 10 days of the date of this letter, I will assume that you consent to this request."
If the lender does not consent, and if you are able to move back into the property at the end of the third year, I do not believe that the previous three-year rental period will be added to any new lease arrangement. Although this idea has not been tested in the courts, to my knowledge, my sense of fair play and contract interpretation leads me to believe that you would be safe in reletting after you have moved back into your property.
Many homeowners are afraid and reluctant to contract their lender when questions such as this arise. Most lenders, in my experience, are responsible and sympathic to human needs. In this case, because you are not trying to "end run" the lender, and are not trying to accomplish a sale through the guise of a lease, I see no reason to avoid a frank disussion with the lender on this issue.
Preventive law is much less expensive than having your "day in court" after the damge has been done.