Does the "due on sale" clause in a Mortgage apply to a transfer to a relative from a trust or through Probate?

I have heard a lot of misinformation regarding the treatment of mortgages at the death of a loved one.  Some people think they will have to qualify for the loan in order to keep the mortgage and house, or that there is a "due on death" clause and the mortgage is due at the death of the loved one, or that the "due on sale" clause applies in this situation.

All the above are false.

There are several exceptions to the "due on sale" clause which can be found in The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8). 

The term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent. 

Some people call this an acceleration clause where the loan is accelerated and becomes due immediately.

One exception in the Garn St. Germain Act is that the "due on sale" clause will not apply to: a transfer to a relative resulting from the death of a borrower.

(e.g. – a transfer from a trust or in probate to a relative, such as a spouse or child)

So this means that the mortgage company cannot call the loan, cannot start foreclosure, etc. just because the property is being transferred to a relative in a trust or probate process. 

You as the relative receiving the property can either continue to keep making the required payments or you can ask the bank to add you on to the loan / assume the loan and then continue to make payments.

Now this does not mean you do not have to pay the mortgage payment.  Of course you have to make the mortgage payment.  If you don't then they can foreclose on the property.

Remember, be sure to get good advice from a attorney that practices Estate Planning and Probate!

For more information contact Attorney Daniel H. Alexander at (800) 530-4529 or review other articles on our website - www.dalexander.com or see the blog http://www.dalexander.com/node/88

This does not constitute legal advice.  Talk to an attorney in person or on the phone.