Due-on-sale clauses are common in mortgages. A due-on-sale clause allows a lender to demand payment in full on the balance of the loan when the mortgaged property is sold, transferred, or otherwise affected. Fortunately for everyday homeowners, there are exceptions to when a due-on-sale clause can be enforced, thanks to what’s known as the Garn-St. Germain Act.
The Garn-St. Germain Depository Act of 1982 mainly addressed deregulation of savings and loans institutions and took other measures to modernize the financial sector. But it also provided protection for homeowners by forbidding lenders from requiring payment in full in many common circumstances, such as:
- Inheritance by a relative
- Transfer to a spouse or child
- Divorce or legal separation
- Taking out a second mortgage or similar loan
- Renting out the property
If you own interest in a property subject to a mortgage, you should know about due-on-sales clauses and when they can and cannot be enforced. Read on for more specifics on the exceptions listed above and others.
When Mortgage Due-on-Sale Clauses Cannot Be Enforced
The exceptions listed in the Garn-St. Germain Act apply to “residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home […]” (*Find 12 U.S. Code section 1701j-3(d) copied in full at the bottom of this post or online here [PDF].)
Situations in which a mortgage’s due-on-sale clause cannot be enforced under the Garn-St. Germain Act:
Transfer of the interest in a property to a family member upon death of the borrower. This is a common situation, as property is often inherited by a spouse, child, or other relative either through a will or other estate planning document or via intestacy laws (i.e., when there is no will). Heirs do not have to worry about satisfying a due-on-sales clause in this case.
Transfer to the surviving joint tenant(s) in a joint tenancy upon the death of the borrower. This situation is common among married and partnered couples in South Carolina who own property as joint tenants with rights of survivorship. When one dies, the property is then wholly owned by the surviving spouse or partner. Lenders cannot enforce a due-on-sales clause when this transfer happens “by devise, descent, or operation of law” – that is, through a will, intestacy laws, or automatically by law.
Note that the statute includes a type of tenant that South Carolina does not recognize, “tenant by the entirety.” Read more about tenancy types in SC on our blog here.
Transfer to a spouse or child. You can transfer your interest in the property to a spouse or child while still alive without having to worry about the due-on-sale clause being enforced.
Transfer to the borrower’s spouse upon divorce or legal separation. If you transfer your interest in the property to your (soon-to-be) ex as the result of the dissolution of marriage, legal separation agreement, or incidental property settlement agreement, the due-on-sale clause cannot be enforced.
Taking out certain loans secured by the property. You can take out a loan that’s subordinate to the primary mortgage without triggering the due-on-sale clause as long as it doesn’t relate to a transfer of rights of occupancy. This includes a second mortgage, a HELOC, or other similar lien or encumbrance.
Renting out the property for no more than a three-year term without the option to purchase. A renter may live in the property for more than three years but should not sign a single lease with a term longer than three years or the lender may be allowed to enforce the due-on-sale clause. Additionally, including an option to buy on a lease of any length means the due-on-sale clause may be enforceable.
Transfer into an inter vivos trust where the borrower remains a beneficiary and the rights of occupancy stay the same. A transfer into an inter vivos trust (also called a living trust) is protected from triggering the due-on-sale clause as long as you are and remain a beneficiary of the trust and occupancy rights don’t change.
Financing household appliances with a purchase money security interest. Getting financing for expensive household appliances through a store’s financing program is often done through a purchase money security interest (PMSI). This specific exception in the Garn-St. Germain Act stops lenders from enforcing due-on-sale clauses when a PMSI is created for household appliances.
In addition to the eight circumstances listed above, due-on-sale clauses are also barred from being enforced upon “any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.”
When Mortgage Due-on-Sale Clauses CAN Be Enforced
We just went over the circumstances in which a lender cannot enforce a mortgage’s due-on-sale clause. But there are still many common situations in which the due-on-sale clause could be enforced, depending on your mortgage’s terms, which you should be aware of. Just some examples include:
- Inheritance of your interest in the property upon your death by a non-relative beneficiary, including a long-term girlfriend/boyfriend
- Transfer during your life to someone other than a spouse or child, such as a parent, sibling, or girlfriend/boyfriend
- Transfer into a trust, except under the specific circumstances described above
- Renting out the property with a lease that lasts longer than three years and/or provides an option to buy
This list is not exhaustive. If in doubt, speak to your mortgage lender and to an attorney about your situation.
What happens if the due-on-sale clause is enforced? In the worst-case scenario, the lender can begin foreclosure proceedings on the house if the borrower can’t pay. More likely, the new owner(s) can take out a new mortgage that will satisfy the old mortgage. Still, this may not be ideal, especially at times when interest rates are high.
Estate Planning, Problem Solving, and More – Call Gem McDowell
Many people do not read mortgage documents thoroughly before signing, so it can come as an unwelcome surprise to have the mortgage lender demand payment in full on the loan citing a due-on-sale clause. That’s why it’s important to know about the due-on-sale clause and when it can and can’t be enforced.
Smart estate planning can help you avoid unwelcome surprises, save your family headaches, and carry out your wishes now and after you’re gone. For help with wills, trusts, powers of attorney, and more, call estate planning attorney Gem McDowell. He and his team help individuals and families in South Carolina create up-to-date estate plans for smart planning and peace of mind. Schedule your free consultation or appointment at the Myrtle Beach or Mt. Pleasant, SC office by calling 843-284-1021 today.
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*Text from the Garn-St. Germain Depository Act of 1982, 12 U.S. Code Section 1701j-3 https://www.govinfo.gov/content/pkg/USCODE-2011-title12/pdf/USCODE-2011-title12-chap13-sec1701j-3.pdf, subsection (d):
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.