Most mortgages contain language to the effect that if property secured by a mortgage is sold or transferred without the lender's prior written consent, the lender has the right to call the entire mortgage due, and insist on payment in full.

The due-on-sale can be triggered by transfers other than a deed.

A lease of three years or more, a lease-option, a contract for deed, moving out of the property within the first year and other transactions also give the lender the option to call the loan due.

 Silent  subject-to Transfers.

Transferring a property in violation of a due-on-sale. makes financial sense in most cases, not putting down a large down payment, or paying loan costs, signing personally on the note.

It also makes more financial sense for a lender to ignore a due-on-sale violation than to incur costs in foreclosing a property.

This is especially true if the loan is already in default and there is little equity in the property.

In most cases, lenders are not concerned with violations of due-on-sale clauses on performing loans.

There is no financial incentive for a lender to enforce a due-on-sale provision on a performing loan if market interest rates aren't much higher.

A lender does not need non-performing loans in its portfolio. 

Mortgage lenders are in the business of making money, and obviously they do not like to allow people to assume a low interest rate when rates are much higher.

There has been much litigation over the due-on-sale provision, and the great majority of the court cases have upheld the lender's right to enforce the due-on-sale clause.

The law used to prosecute borrowers who lie on their loan applications,  is virtually never used to prosecute due-on-sale violators.

The United State Supreme Court, ruled that, if a borrower simply transfers title, without making any statements to the lender, then there can be no fraud.

Even though the loan documents contain the due on sale clause, Federal law also permits certain transfers.

The Garn-St. Germain Act,  enacted in 1982,  imposed certain restrictions on the enforcement of this clause.

This law contains nine specific exemptions where a lender is not permitted to exercise the due on sale clause.

When there is a real property loan secured by a lien on residential real property containing less than five dwelling units -- including a lien on the stock of a cooperative housing corporation -- a lender could not enforce the due on sale clause under the following circumstances:

  • A transfer where the spouse or children of the borrower will become an owner of the property;
  • A transfer to a relative resulting from the death of a borrower;
  • A transfer by operation of law on the death of a joint tenant or tenant by the entirety;
  • 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;
  • 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 (i.e. the so-called "Living Trust");
  • The creation of a purchase money security interest for household appliances
  • The granting of a leasehold interest of three years or less not containing an option to purchase;
  • A subordinate lien which does not involve a transfer of rights of occupancy in the property, and
  • Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

While there probably is no reason for the lender to challenge you, it is always best to keep the lender informed -- before you take any steps to change ownership.

 Due - on - Sale


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