Due-On-Sale Clause

Why is this important?

If you have a loan on real property, and you decide to sell that property but neglect to tell the bank that has given you the loan, you may run into a due-on-sale clause.

A due-on-sale clause is a clause in a contract that allows a lender to demand that the entire debt is due if the mortgaged property is sold without the lender’s consent. Thus, if you fail to notify the bank when you sell your real property (or transfer the title), your bank may foreclose on your real property.

Why does this exist?

During times of inflation and increasing interest rates, lenders have to pay more to borrow money, while they receive a fixed, below-market rate of return for their current loans. Due-on-sale clauses provide protection from inflation risk and market risk because they authorize the lender to receive a favorable interest rate adjustment before the mortgage’s maturity.

Will a transfer to a Trust violate my mortgage (due-on-sale clause)?

Generally, the transfer to an interest to a trust will not violate a due-on-sale clause and will not trigger a foreclosure.

Specifically, a lender is not allowed to enforce a due-on-sale clause if the following occurs:

  • A transfer made into an inter vivos trust (also known as a living trust, grantor trust, and in some cases an irrevocable trust) where the borrower remains a beneficiary and does not relate to a transfer of rights of occupancy in the property;
  • The creation of a lien to the lender’s security instrument that does not relate to a transfer of rights of occupancy in the property;
  • A purchase money security for household appliances is created;
  • A transfer on the death of a joint tenant or tenant by the entirety;
  • A leasehold interest of three years or less that does not include an option to purchase is granted;
  • A transfer made to a relative as a result of the death of a borrower;
  • A transfer that makes the spouse or children of the borrower an owner of the property;
  • A transfer that makes the spouse of the borrower an owner of the property, resulting from the dissolution of marriage, legal separation agreement, or an incidental property settlement agreement; or
  • Any transfer that relates to the regulations of the Federal Home Loan Bank Board.

For more information on Estate Planning and Trust Planning in Cincinnati, Ohio, feel free to contact Elliott Stapleton for more information.

Probate and Estate Planning Topics:

Information from “12 U.S. Code § 1701j–3 – Preemption of due-on-sale prohibitions” from www.law.cornell.edu and “4B Real Estate Financing § 3E.04.”