Understanding the Legality of Subject To ‘Subto’: A Guide for Sellers and Agents

Understanding the Legality of Subject To ‘Subto’: A Guide for Sellers and Agents

Sellers and agents, have you been approached with a Subject To ‘Subto’ transaction or heard discussions about it and pondered, “Is Subject To ‘Subto’ genuinely legal?” Here’s your answer: Absolutely, Subject To ‘Subto’ is entirely legal. But rather than relying on word-of-mouth, let’s delve into official directives from the IRS, Fannie/Freddie, and HUD. With this arsenal of information, you can converse about Subject To ‘Subto’ with clarity and authority, backed by facts, not mere speculation.

The Legal Landscape of Subject To ‘Subto’ for Sellers and Agents

In the pivotal case Field V. Mans, 1995.S.Ct.207 (1995), the U.S. Supreme Court articulated that it isn’t fraudulent to transfer the title without informing the lender, thereby violating a due-on-sale clause. In another consequential ruling, Field v Mans, 516 US59 in 1995, it was elucidated that lenders cannot brand it as “Fraud” when borrowers ask for permission post the actual transfer of a property. The reasoning? Lenders possess the means to authenticate such transitions from public archives.

Though not a universally binding legal position, it’s noteworthy that several Supreme Court justices opine that infringing a due-on-sale clause is not fraudulent if done without notifying the lender.

Reflecting on Medovoi v American Savings & Loan, 89 Cal.App.3d 875 (1979), it was decreed that lenders can’t take legal action against a buyer for deliberately hiding a transfer, as there’s no legal mandate to inform the lender of such transactions.

Debunking Common Misconceptions for Sellers

Many sellers harbor the fallacy that transferring a property’s title subjected to a “due on sale” mortgage is illicit. However, to earn the label “illegal”, it must breach a criminal statute. Crucially, no state or federal edict criminalizes the transgression of a “due on sale” clause. So, rest assured, there’s no incarceration looming over this!

While property proprietors can legally delegate their asset’s interest, the responsibility for settling any affiliated loans remains intact. It’s essential to discern that the “due on sale” clause is predominantly a lender’s contractual prerogative rather than a legal mandate.

The Garn St. Germain Act Demystified for Agents

Agents, here’s an essential piece of legislation to familiarize yourselves with: The Garn St. Germain Act. This statute empowers banks to invoke the “Due on Sale” clause. Yet, it also catalogs specific scenarios where this clause stands nullified:

1. The creation of a lien or other encumbrance subordinate to the lender’s security instrument (the mortgage) which does not relate to a transfer of the rights of occupancy in the property;
2. The creation of a purchase money security interest for household appliances;
3. A transfer by device, descent or operation of law on the death of a joint tenant or tenant by the entirety;
4. The granting of a leasehold interest of less than three years containing an option to purchase;
5. A transfer to a relative resulting from the death of a borrower;
6. A transfer of a spouse or children of the borrower when they become an owner of the property;
7. A transfer resulting from decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
8. A transfer into an inter-vivos (during one’s life) trust in which the borrower is and remains a beneficiary and that does not relate to a transfer of rights of occupancy in the property;
9. Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

Although the Federal Home Loan Bank Board transitioned to the Office of Thrift Supervision, the foundational principles linger. The Garn St. Germain Act clearly specifies its applicability to residential homes housing one to four families, sidestepping the intricacies of owner occupancy.

In Conclusion

For both sellers and agents, discerning the legal contours surrounding Subject To ‘Subto’ is imperative. The consensus rings clear: Subject To ‘Subto’ operations are squarely within the bounds of the law. Armed with this knowledge, sellers and agents can navigate the Subject To ‘Subto’ terrain with heightened confidence and precision.