Most, if not all mortgages contain what is called a “due on sale” clause. These clauses generally provide that if the borrower sells or transfers the property encumbered by the mortgage, then the lender has the right to declare the mortgage immediately due and payable.
While this type of rule does seem fair in the context of an arms-length deal, what about situations where the property is being transferred from a deceased person to his children or other beneficiary pursuant to a will? Should the estate be subject to the “due on sale” clause and be responsible for paying the mortgage in full at the moment of transfer? Or if the estate cannot afford it, should the beneficiary be stuck with the bill?
Fortunately, a federal law called the National Housing Act and commonly known as the Garn–St Germain Depository Institutions Act says “no” if the property contains less than five dwelling units or is a cooperative apartment Additionally, New York State passed their own version of the law which also states that the “due on sale” clause is invalidated in many situations, some of which include:
- a transfer pursuant to a will or a transfer resulting from the death of a borrower;
- a transfer where the spouse or children of the borrower become an owner of the property; or
- a transfer pursuant to a divorce or a legal separation agreement.
Both laws state that the lender may not exercise the “due on sale” option where the borrower transfers the property to his spouse or children during the borrower’s lifetime. Accordingly, a person could transfer property to their child or spouse in life without the mortgage becoming immediately due and payable.
Unfortunately, while this is the law which applies, mortgages rarely state that there are permissible transfers. Instead, the “due on sale” clause only tells the borrower that if they transfer the property, the mortgage is immediately due and payable. It is up to the borrower to dig through the statutes and scrutinize their contents to determine whether their transfer is exempt. This seems categorically wrong. Since the lender has actual knowledge that these exemptions exist, it should be their responsibility to inform the borrower of the same in the mortgage document itself.