02/08/10: The “Due On Sale” Concept
By Benny L. Kass
Q: My wife and I are in the process of getting divorced. I am prepared to give her the family home so our children will not be disrupted any more then they already are. I know that our mortgage lender will not relieve me of our joint obligation to make the monthly payments but hopefully that will not be a problem. We have been advised us that a lender can use the “due on sale” clause in the mortgage documents and block this transaction. Can this happen?
A: The short answer is no. Federal law permits certain real estate transfers even though the loan documents contain the “due on sale” clause.
Let’s look at this concept. 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.
This scenario sounds unlikely in today’s market place, but many readers will recall the excessively high mortgage interest rates during the past decade.
Thus, many years ago, the mortgage industry came up with the concept of “due on sale”. Most mortgage loan documents contain language to the effect that if property which is 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. This is known as the “due on sale” clause.
There has been much litigation over this concept throughout the country, and the great majority of the Court cases have upheld the lender’s right to enforce the due on sale concept.
In l982, however, Congress enacted the Garn-St. Germain Act (12 UCA 1701j-3), which imposed certain restrictions on the enforcement of this clause.
This law contained 9 specific exemptions where a lender was not permitted to exercise its option pursuant to a 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 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 where the spouse or children of the borrower 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 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 (i.e. where you pledge your house in order to replace you heating and air conditioning system);
- 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.
I highlighted your situation by listing it first on the list. Clearly, if you and your spouse enter into a formal, legal separation agreement, or actually have a court order granting a divorce – which contains language reflecting the house transfer –you are protected under the law and the lender cannot exercise the due on sale clause which I suspect is contained in your mortgage documents,
However, here are some suggestions before you proceed to transfer the property to your wife:
First, before the divorce is finalized, arrange to transfer the house. Normally, when real property is sold -or transferred -there is a transfer and recordation tax that has to be paid to the local jurisdiction. For example, in the District of Columbia, if the property is appraised at over $400,000, the District government will want to collect 2.9 percent of the appraised price. Normally, if you sell to a third party, each side will split these costs, paying 1.45 percent. (If the property is worth less than $400,000, the taxes are lowed to 1.1 percent each).
However, if you are married and transfer the property to your spouse, you do not have to pay either of these taxes. You only have to pay a nominal fee to record the deed – usually less than $30.00.
So, discuss this with your attorney and arrange to transfer the property before the divorce decree becomes final.
Second, what is your current mortgage interest rate? Rates are quite low today, s o you might want to consider refinancing first, so as to take advantage of that lower rate. After that, you can have the property transferred to your wife. You will, of course, have to explain your pending divorce situation to the lender, but if you can qualify, there could be a substantial monthly saving.
Finally, I strongly recommend that you advise your lender of your plans. Legally, it has no legal right to content your decision, but it always makes sense to keep lenders informed – before you take any steps to change the ownership.