Limitations on Enforcing Due on Sale Clauses

Peter E. Iorio      Mar. 18, 2021

photo of mortgage document“Due on Sale” clauses found in many mortgages generally allow a lender to demand payment in full of a loan, upon the transfer of an interest in the mortgaged property. The Garn St. Germain Act (12 U.S.C. Section 1701j-3) provides that regardless of the agreement between a borrower and lender, a lender may not enforce the due on sale clause in a residential mortgage if one of the following exceptions occurs:

  • A transfer was made by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  • A transfer was made to a relative resulting from the death of a borrower;
  • A transfer was made where the spouse or children of the borrower become an owner of the property;
  • A transfer was made resulting from a decree of a dissolution of marriage, legal separation, or property settlement agreement, where the spouse of the borrower becomes an owner of the property; or
  • A transfer into a trust in which the borrower remains a beneficiary and that does not relate to a transfer of rights of occupancy in the property.

Following the transfer of property qualifying under the Garn St. Germain Act, the subsequent owner of the property takes it subject to the terms of the existing mortgage. This means that the new owner is not required to refinance the terms of the mortgage, and as long as timely payments continue to be made, the loan will not be in default. This is especially beneficial in situations where the new owner has a low credit score or otherwise would not be able to obtain a mortgage on his/her own. In the administration of an estate, this law can greatly benefit children of a Decedent, where one child inherits the residence and desires take over mortgage payments. It is possible for the Estate to survive the probate process with the mortgage still in effect, which allows for greater flexibility in the administration of an Estate.

Federal law prohibits financial institutions from demanding immediate payment of a residential loan if a transfer of real property is an allowable exception. Please contact one of the Attorneys in the Estates or Corporate, Business & Banking Groups if you have questions about the implications of the Garn St. Germain Act on your mortgage loans.

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