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Due-on-sale clause: Lender gets power to call the loan due

Posted on: 10th Apr, 2004 03:52 am
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.
Related Forum Discussions
my little sister would like to purchase my current home .Her income is pretty low but the amount of rent she is going to pay equals to my mortgage payment.If she can afford rent ,can she afford a mortgage that matches with insurance and taxes included.Would that rent payment help her get approved for the assumptin
Posted on: 02nd Nov, 2008 04:02 pm
Hi moni,

If the lender takes the note of the alternative credit score (i.e utility bills, rent payment etc.) and approves the loan, then your sister can get the loan. However, you should remember that this is done in rare cases. I think your sister should first talk to few lenders and see if she can get the loan.

Thanks.
Posted on: 03rd Nov, 2008 01:30 am
Posted on: 09th Feb, 2009 03:16 pm
You can consult an attorney who will be able to explain the Garn st Germain bill and the clause that covers the exemptions.
Posted on: 14th Feb, 2009 12:48 am
A small mortgage my husband has on our second home has the "due on sale" clause. We want to turn this property into a rental, held by an LLC. The lender has stated that the borrower may transfer the deed in certain situations pointed out in the Garn exemptions, not including an LLC...if my husband transferred the deed to me, and by the wording "transfer" in the exemptions, I am assuming he can Quit Claim his name completely off, then as the only name on the deed, would I be allowed to create an LLC and transfer the deed to it without jeopardizing the "due on call" of the lender?
Posted on: 11th Jan, 2013 09:17 am
Hi Zamette,

This is a legal issue and it will be better if you could get in touch with a real estate attorney and check out whether or not an LLC formation will jeopardize your property.
Posted on: 13th Jan, 2013 11:24 pm
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