Losing a loved one, particularly a spouse, is an emotionally taxing event. That loss is compounded when it triggers financial issues, especially those that impact a home. What real estate buyers may not realize when they obtain a loan is that the loan terms often permit a lender to call a mortgage loan due in the event one of the borrowers dies, even if payments are being made.
Understanding the “Due-on-Sale” Clause
Commonly known as a “due-on-sale” clause, this contract provision authorizes a lender, at its option, to declare an entire mortgage loan balance due and payable upon the sale or transfer of all or part of the property, or an interest in it, if that sale or transfer is done without the lender’s prior written consent. These provisions make sense in the case of a sale by an owner to a new buyer – after all, you don’t expect your lender to simply transfer your loan to the person who buys your property.
But what happens when you and your spouse have a mortgage and your spouse passes away? Two owners now become one owner, and that is considered a transfer under many loan contracts, which can then trigger the lender’s ability to call the loan due. It is also a transfer when property is distributed to your beneficiaries after your death.
Legal Protections Against Due-on-Sale Provisions
Fortunately, both federal law and Michigan law provide relief in limited situations. Congress enacted the federal Garn-St. Germain Act, which permits the regulation of due-on-sale clauses in mortgage loans covering residential real property containing fewer than five dwelling units, including stock in a cooperative housing dwelling and manufactured homes. In those instances, the lender may not exercise the clause when the interest involves:
- a transfer by devise(e.g., by will or trust), descent, or operation of law on the death of a joint tenant or tenant by the entirety(a spouse);
- a transfer to a relative resulting from the death of a borrower, or
- a transfer where the spouse or children of the borrower become an owner of the property.
If your estate plan includes a trust that holds the type of residential property described above, the act of transferring that property to your trust will not trigger a due-on-sale provision as long as you remain a beneficiary of the trust and there is no transfer of rights of occupancy in the property. In short, typical trust funding is not a concern.
While the Garn-St. Germain Act does not entitle a borrower to file suit against a lender if the lender improperly enforces a due-on-sale mortgage provision, Michigan law does. Under Michigan law, a lender who knowingly enforces or attempts to enforce a due-on-sale clause in violation of state law can face civil fines, be liable for damages, and be ordered by a court to stop improper enforcement of the due-on-sale provision. Please note that even though the lender may be prohibited from enforcing a due-on-sale provision, that doesn’t mean the mortgage loan is forgiven. The balance and accrued interest must be paid according to the terms in the loan documents.
Don’t Take Chances – Talk to an Attorney
If you are concerned that a transfer you wish to make, or which has happened due to a life event, may cause a due-on-sale or other issue with your mortgage lender, you need to consult an experienced estate planning and real estate attorney as soon as possible. The lawyers at Kreis Enderle are well versed in these matters and can discuss your concerns with you and guide you to the right solution.