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Understanding Mortgage Transfer and Due on Sale Clauses

… My spouse died, and I am the surviving tenant by the entirety of our house?

… My parent died, and I am the surviving joint tenant of our house?

… I inherited a house from a relative and now reside in it, and have been making the monthly mortgage payments?

… I transferred my house to a living trust for Medicaid planning and/or to avoid probate?

The answer to all four of these questions is an astounding: NO!

However, sometimes banks and mortgage lenders will still try to enforce a “due on sale” clause on an existing loan or mortgage. Due on sale clauses allow lenders to accelerate or “call in” the loan or mortgage and demand payment of the entire balance upon the transfer of the title to the property securing the loan.

The Garn-St. Germain Depository Institutions Act of 1982 is a federal statute which governs the enforceability of “due on sale” clauses in loan and mortgage contracts. Notwithstanding, certain transfers of property, subject to an existing mortgage (other than a reverse mortgage), are exceptions prohibiting a lender from enforcing a due on sale clause.

For example, a lender is prohibited from exercising its option to enforce a due on sale clause upon a “transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety” (when the surviving joint tenant/tenant by the entirety takes title to the property after a joint tenant/tenant by the entirety dies), a “transfer to a relative resulting from the death of a borrower” (when a relative takes title to the property via inheritance and then resides in the property), and a “transfer into a 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” (when title to the property is transferred into a living trust such as a Medicaid Asset Protection Trust).

It is important to note the significance of the last exception for property owners transferring a house with an existing loan or mortgage (other than a reverse mortgage) into a Medicaid Asset Protection Trust for Medicaid planning and/or the avoidance of probate. A Medicaid Asset Protection Trust is an inter vivos living trust wherein the grantor, who is the loan or mortgage borrower, retains the right to occupy the property and is a beneficiary of the trust.

In all of the above situations, pursuant to the Garn-St. Germain Act, the lender is barred from calling in the loan or mortgage.

The Garn-St. Germain Act provides certain rights and protections to a surviving spouse, a surviving joint tenant, a surviving tenant by the entirety, and a relative who inherits, when property with an existing loan or mortgage (other than a reverse mortgage) is transferred. The death of a loved one is an emotional time, never mind having to worry about a lender calling in the balance due. The Garn-St. Germain Act also recognizes that a property owner may engage in estate planning and transfer property with an existing loan or mortgage (other than a reverse mortgage) to a living trust during life.

We understand the rights and protection you are afforded under the Garn-St. Germain Act. It is important when transferring the title to a house subject to an existing loan or mortgage (other than a reverse mortgage), whether upon death or during life, to consult with and retain attorneys experienced with the transfer of property. Russo Law Group has knowledgeable attorneys who can provide professional services and advise you.

We invite you to take advantage of our comprehensive website as well as our free seminars and webinars to learn more about how Russo Law Group may assist you.

Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530

This Post Has 2 Comments

  1. Thank you for this article.
    Before my fathers death, a family attorney filed a transfer upon death so that i wouldbe anle to stay in my Dads home and continue making payments on his heloc account.
    My father passed in July of 2018.
    Six months later I filed the deed transfer.
    Now the credit union where he got the Heloc is demanding I refinance in my name.
    I have never missed or been late on a payment

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