By Beth A. McDaniel, JD, CELA

 

You are probably familiar with mortgage ‘due-onsale’ clauses. If a mortgage contains this clause, a sale or partial sale of the mortgaged property may require the mortgage or other loan to be paid off in full.

The Garn-St Germain Depository Institutions Act, signed into law by President Ronald Reagan on October 15, 1982  introduced adjustable-rate mortgages, removed interest limits on banks and savings and loans, affirmed that due-onsale clauses are legal, and provided several exceptions for a due-on-sale clause. Here are defined situations in which a due-onsale clause cannot be enforced: 

• Creation of a second mortgage
• Purchase money liens for household appliances
• Termination of joint tenancies (where all joint tenants, but one, die or assign his or her interest to one remain tenant/owner)
• Leases of less than three years
• A transfer to a relative resulting from the death of a borrower and the relative uses the residence as his or her primary residence (note: the act does not define ‘relative;’ thus, nieces, nephews, or a stepchild are likely covered, but it is not clear)
• Divorce or legal separation settlements or court orders
• Transfers into an inter vivos trust (most commonly, a revocable living trust), if the borrower is a beneficiary of the trust
• Transfers approved by the relevant federal agency

Note that the exceptions apply only to residential properties; however, a five-unit apartment or less would still qualify as residential property if a unit was occupied by the borrower.

It is helpful to know that inheritance of a house by a relative does not require the relative to refinance the property. The relative can continue to make payments on the existing mortgage.

Obviously, the relative should have the means to make the payments on time and in full along with the ability to pay other obligations associated with the property, such as insurance and property taxes. In this situation, it is optimal for the relative to have good credit should he or she wish to secure a better interest rate or more favorable terms than the original mortgage.

Should you intend for a relative to inherit your residence and assume your mortgage, unless the relative is your only child, you need to make this intention known in your will or trust. Upon your death, your acting trustee or courtappointed personal representative should familiarize themselves with the terms of your mortgage.

They should contact the mortgage company and request any mortgage assumption forms the company requires. Consider too that if there are other heirs who have an equal interest in the residence, the relative needs to have the means to pay the other heirs for their interest in the residence. Sometimes this can be done with other inherited assets, but not always.

 

For more information, or to schedule an appointment, please call 425-251-8880 or email info@bethmcdaniel.com

 

First Published: June 2023