About Mortgage “Due On Sale” Clauses

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If you want to leave your home (or rental property with four or fewer units) to your children, grandchildren, or anyone else – and that property is subject to a mortgage – you should know this.

Virtually every mortgage has a “due on sale” clause. The clause states that your mortgage is due in full if you sell or transfer your property. Notice, it doesn’t just happen upon sale. It happens whenever ownership interest is transferred.

On its face this could present a problem. For instance, if you set up a trust and then transfer your ownership to the trust, this clause would result in the mortgage becoming due. If you didn’t pay up with funds from another source or through refinancing, the lender could foreclose on the property. Likewise, at your death, when your ownership interest is transferred to your beneficiaries, the mortgage would become due and payable in full.

Luckily, there is a federal law that trumps the “due on sale” clause. It is the Garn–St. Germain Depository Institutions Act of 1982 and it allows you to place real estate in a trust without triggering the “due on sale” clause. As long as the residential property has less than five dwelling units, the “due on sale” clause in not enforceable when the property is inherited, or when the property is transferred to a revocable living trust – a common estate planning technique that our firm thinks is superior to others in many cases.

Below is the actual language of the Act:

(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon –
(1)    The creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2)    The creation of a purchase money security interest for household appliances;
(3)    A transfer by devise, 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 three years or less not containing an option to purchase;
(5)    A transfer to a relative resulting from the death of a borrower;
(6)    A transfer where the spouse or children of the borrower become an owner of the property;
(7)    A transfer resulting from a decree of a 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 trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property…

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