Is your mortgage due on sale?

Most residential mortgages contain a provision requiring payment of the remaining balance of the loan when the property is sold.  This is called a “due on sale “ clause.  This is a contractual right reserved in the mortgage, permitting the lender to accelerate the loan maturity in the event that the borrower conveys the property to a third party.  An assumable loan, in contrast, is one secured by a mortgage which does not contain such a due on sale provision; some assumable loans may include criteria that if met to the lender’s satisfaction will allow a purchaser to assume the loan.  If there is a due on sale clause in your mortgage, the language of the mortgage usually permits the lender to accelerate the loan if you take out a second mortgage or a home equity line of credit subordinate to that lender’s loan.

The Garn St. Germain Act at 12 USC Section 1701J-3 provides exceptions for real property loans secured by a lien on residential real property containing one to four dwelling units, pursuant to which the lender may not exercise its option under the due on sale clause, in the following situations:

  1. Creation of a lien or other encumbrance subordinate to the lender’s mortgage which does not relate to a transfer of rights of occupancy in the property (for instance, a home equity line of credit or a second mortgage).
  2. Creation of a purchase money security interest for household appliances (for example, a long term lease for solar panels installed on your roof).
  3. Transfer by devise, descent or operation of law on the death of a joint tenant or tenant by the entirety.
  4. Granting of a leasehold interest of three years or less not containing an option to purchase.
  5. Transfer to a relative resulting from the death of a borrower.
  6. Transfer where the spouse or children of the borrower become an owner of the property.
  7. Transfer resulting from a decree of a dissolution of a 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 that does not relate to a transfer of rights of occupancy in the property (and this type of transfer is a common technique in estate planning).

These exceptions supersede the express language of the mortgage.

If you have questions, in regard to the transferability of your property subject to a mortgage, contact Frank Ravinal.