"Due-on-Sale"

Due-on-Sale-Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

One trend in the mortgage industry has been the virtual disappearance of assumable mortgages. This is unfortunate for homebuyers, since an assumable mortgage allows them to retain a below-market interest rate and avoid many closing costs, such as a credit check and appraisal. Except for certain FHA and VA loans, almost all mortgages now contain a “due-on-sale” clause which require that the mortgage be paid if there is a change in ownership.

Typical “due-on-sale” language states that, “the Lender may, at its option, declare immediately due and payable all sums secured by the Mortgage upon the sale or transfer, without the Lender’s prior written consent, of all or any part of the Real Property, or any interest in the Real Property.” A reading of the language shows that the term, “due-on-sale” is misleading. In fact, the mortgage may be called in if there is any transfer of any interest in the real estate, and not just a sale of the property.

Some examples may show how far reaching the “due-on-sale” clause can be. The most obvious example is a land contract, also known as a Contract for Deed. Since a Contract for Deed passes equitable title to a potential buyer, such a contract is a violation of the “due-on-sale" clause, even though the seller retains legal title. This entitles the Lender to call in their mortgage and demand payment in full.

It is possible that even a long term Lease will allow the Lender to accelerate their mortgage, especially if the Lease contains an option to purchase. There is some case law indicating that any lease longer than three years will trigger the “due-on-sale” clause. But any Lease that contains an option to purchase will be sufficient to call in the loan if it contains an option to purchase the property, regardless of the length of the Lease.

For tax and probate purposes, some people transfer their property into a Land Trust, also know as a Living Trust. These Trusts do not trigger the “due-on-sale” clause, if the current owners are also the sole beneficiaries of the trust. However, if you transfer your home into a Land Trust with your children as beneficiaries, the Lender may call in the loan. Also, the exemption for Land Trust only applies to owner-occupied homes, and no investment property.

What if one spouse signs a Quit Claim Deed to remove their name from the Deed as the result of a divorce settlement? This is certainly a transfer in ownership. However, federal law prevents the Lender from demanding immediate repayment of their loan simply because two joint co-signors get a divorce. However, the spouse who signs the Quit Claim Deed still remains liable on the Mortgage, even though their name is no longer on the Deed.

Lenders are entitled to know to whom they are loaning money, and to set terms and conditions. Moreover, the “due-on-sale” clause is now required by various federal agencies. While such a clause may hinder some real estate deals, they makes solid business sense.

Basically the due on sale clause is a statement within the deed of trust or mortgage depending of the state you reside that says that if the the person who takes out the mortgage decides to sell the house then the mortgage or deed of trust given for collateral has to be paid in full. Note the due on sale clause is rarely called into play when transfering title or ownership by mortgage companies.

Due On Sale Clause is on almost every mortgage note.

According to Title 12 of the US Code 1701-j-3, a federally enacted law (the Garn-St. Germain Act, aka: the Federal Depository Regulations Institutions Act of 1982), there is no due-on-sale violation when a property is placed into a legitimate inter-vivos trust by a borrower who is a natural person, so long as the borrower is, and remains, a beneficiary of the trust; so long as the trust is revocable and does not confer occupancy rights to another.