Due-on-sale clause exceptions may not pertain to you, but it's important to understand what they are. A due on sale clause stipulates that a mortgage must be paid in full upon the sale of the property. In other words, the lender can demand payment as soon as the property is sold. You may also hear this referred to as an acceleration clause. 

Due-on-sale clauses protect lenders from interest rates that are below market. Note that this is not a law but, rather, a contractual right. So, if the property title should ever be transferred, the bank may be able to call the entire loan into payment. 

These clauses are important when someone wants to sell a home without paying off the remaining balance on the loan. This allows the current lender to call the loan due when the title is transferred. If a lender feels like its security is going to be at risk, or if it believes it can make more money, a due on sale may be enforced. For example, if interest rates are rising, a lender may be interested in enforcing a due-on-sale clause. 

When a due-on-sale clause is enacted, a seller cannot transfer their mortgage directly to the buyer. First, the proceeds from the sale must go toward paying off the mortgage. Then, the buyer will take out another home loan. 

Due-On-Sale Clause Exceptions

A due-on-sale clause may not be easy to find in the midst of all the paperwork. Also, it may be written in as an acceleration clause, but the stipulations will remain the same. While you may have to sift through several pages to find it, nearly every loan created after 1988 contains an acceleration clause. 

There are instances when a lender will not be able to exercise a due-on-sale clause:

  • When a lien does not relate to the transfer of rights of occupancy
  • When a leasehold interest does not contain an option to purchase and it's been three years or fewer
  • When the borrower is deceased, and the property is transferring to a relative
  • When the transfer is taking place between the children or spouse of the borrower
  • When the transfer is occurring as a result of a decree from a separation, divorce, or incidental property settlement agreement

(Note: This list is not exhaustive.) Many of these exceptions can be attributed to the Garn-St. Germain Act of 1982. It put many of these stipulations in motion. For example, a lender would be unable to institute a due-on-sale clause if a piece of property was once owned by two parties and is now owned by a single party. The Garn-St. Germain Act is also responsible for the above exceptions pertaining to children, the death of a borrower, or exemptions pertaining to a living trust. 

Living Trusts and Land Trusts

A land trust is one form of a revocable, living trust. The Garn-St. Germain Act has exempted these from due-on-sale provisions. Land trusts are created using two legal documents:

  • Trust agreements between the grantors (or creators) of the trust and trustees (or those who define the trust agreement)
  • Deeds between those who created the trust and the trustee

In these instances, a trustee will hold the title. Also, if that title is placed into a land trust, the due-on-sale clause will not be in violation as long as there's no change in occupancy. 

Lenders will notice a real estate transfer in any of these ways:

  • If there's a change of name on the deed
  • If there's a different name on the check received for payment
  • If there's a change in the hazard insurance beneficiary

If a title is transferred into a land trust, the new beneficiary will be appointed trustee. In this instance, the lender isn't likely to object because it will assume the seller has an estate planning device in place. 

However, a lender will not be notified if the beneficiary of the trust is assigned. In this instance, the trustee will be the same. This reduces the chances of the lender uncovering the change. If a lender is using a servicing company, this becomes especially true. 

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