 Sam
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 Posted: Sat Apr 10, 2004 3:52 am Post subject: Due-on-sale Clause |
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Due-on-sale clause is a provision in a mortgage agreement which allows the lender to call the loan due and payable if the borrower sells or transfers or encumbers his property.
Example:
John takes a mortgage worth $100, 000 from Janis. After 2 years, the remaining balance turns out to be $60,000. In the same year, John wants to sell off his house. At this time, Janis demands the loan balance from him. This is because the mortgage document includes a "Due-on-sale" clause, which allows her to demand the loan payment.
Some Exceptions:
There are mortgage programs which do not enforce the Due-on-sale clause. These are known as assumable mortgages. Moreover, FHA-insured mortgages originated before December 1989 and VA guaranteed loans offered prior to February 1988 are without any due-on-sale clause.
The Garn St. Germain Act of 1982 imposes certain restrictions on the enforcement of the due-on-sale clause.
For residential mortgages against properties with less than 5 dwelling units, including a lien on the stock of a dwelling unit in a cooperative housing corporation, or on a manufactured home, a lender cannot enforce the due- on-sale clause. The specified circumstances are given below.
- Property is transferred to any relative after the borrower passes away.
- There is a transfer by which the borrower's spouse or children get the ownership of the property.
- The property has a subordinate lien which does not allow the transfer of rights for possessing the same property.
- Property is transferred by will, descent or by operation of law on the death of a joint tenant or tenant by entirety.
- There is a transfer due to decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement. Such a transfer makes the borrower's spouse a co-owner of the property.
- Leasehold interest on the property is granted for 3 years or less without any option to purchase.
- The property is transferred into a living trust of which the borrower is a beneficiary. The transfer is such that it is not related to the transfer of rights of occupancy in the property.
- Property is transferred as per the regulations of the Federal Home Loan Bank Board.
- Purchase money security interest is created for household appliances. For instance, you can pledge your home in order to purchase an electrical appliance.
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