There is a lot of misunderstanding about the “due-on-sale” clause in most mortgage documents. Most loans permit a lender to call a mortgage loan (require it to be paid in full) when the real property is sold or transferred. However, there are some major exceptions to this rule, many surrounding the borrower’s death or transfers for estate planning purposes.
Federal law, and most state laws, protect borrowers in some specified situations. Congress enacted the Garn-St. Germain Act which regulates due-on-sale clauses in mortgage loans. The law states that the lender MAY NOT exercise the clause when one of the following occures:
- a transfer by devise (e.g., by will or trust), descent, or operation of law on the death of a joint tenant or tenant by the entirety (a spouse);
- a transfer to a relative resulting from the death of a borrower, or
- a transfer where the spouse or children of the borrower become an owner of the property.
Moreover, the transfer of your residence to a trust, does not trigger a due-on-sale provision as long as the transferor remains a beneficiary of the trust and there is no transfer of rights of occupancy in the property. In short, funding most types of trusts is not a concern.
Please note that while the lender may be prohibited from enforcing a due-on-sale provision, that doesn’t mean the mortgage loan is forgiven. The balance and accrued interest must be paid according to the terms in the loan documents.
If you are concerned that a transfer you wish to make, or which has happened due to a death, or a transfer to your spouse or children, may cause a due-on-sale or other issue with your mortgage lender, it’s important to consult an experienced estate planning and real estate attorney as soon as possible. The lawyers at Altman & Associates are well versed in these matters and can discuss your concerns with you and guide you to the right solution.