Due-On-Sale Clauses

Can due-on-sale clauses prohibit the transfer of property with loans to spouses or children?

Q: The Garn-St. Germain Act prohibits enforcement of a due-on-sale clause in a transfer where the spouse or children of the borrower become an owner of the property. Does the “transfer” mean inherit, or does it also include “sale” where the deceased and the spouse are tenants in common?

A: Congress passed the Garn-St. Germain Act back in 1982. One of the provisions of the Act was to prohibit lenders from exercising their due on sale rights when a homeowner passed away and the home inherited by one of the deceased owners’ children or spouse. It also allowed for the transfer of the home to living trusts and transfers between ex-spouses as a result of a divorce.

Prior to the passage of the Act, when you purchased a home, the loan documents contained a clause that basically stated that if you transfer your ownership in the home without the lender’s permission, the lender has the right, but not the obligation, to call the loan and request the repayment in full.

My Father Died And Had A Mortgage. Can I Keep It?

To avoid situations where there are life changing circumstances, the Act alleviates some issues where the home goes to the kids, the spouse or where an owner wants to put their home into a living trust for estate planning purposes.

You mentioned that the owners of the home you are concerned about own the home as tenants in common. This means that when one owner dies, the other owner does not automatically inherit the deceased owner’s interest in the home. If they owned the home as joint tenants with rights of survivorship, the surviving owner gets the home automatically upon the death of the co-owner.

So, if you mean if the deceased owner’s share of the home can go to anyone, the Act would not protect that transfer. But if the deceased owner’s share of the home would go to the widow, his kids or her kids, then the lender shouldn’t be able to call the loan, even if the widow, her kids or his kids paid for the interest in the home they were taking over.

On the other hand, if your question implies that the widow and the heirs intend to sell the home to a stranger, the lender could call the loan in that situation. These days, interest rates are around 7 percent for a 30-year loan. It was only a couple of years ago that interest rates were around 2.5 percent.

I Pay My Parents’ Mortgage. Do I Have to Tell the Mortgage Company?

Many home buyers would love to buy a home and take over a low interest rate loan. To do that, the prospective home buyer should work with the seller’s lender to see if they can assume that loan. Some loans have due-on-sale clauses. Other loans are assumable. Those loans issued by the Federal Housing Administration (FHA) are assumable. But the prospective buyer must go through the process of getting approved and a fee is paid to the lender for that assumption.

Most loans other than FHA loans are not assumable. You can contact your current lender and find out if they allow assumptions or if they have a due-on-sale clause. We suspect you’ll be told that the loan is yours and that your prospective buyer must get their own loan.

If our readers are finding out that non-FHA lenders are agreeing to loan assumptions, please let us know. Finally, we have some information about FHA loans and assumable loans on the ThinkGlink.com website you might find helpful. Thanks for your question.