A "due-on-sale" provision, also known as an acceleration clause, is a clause in a mortgage or deed of trust that requires the borrower to pay off the entire outstanding balance of the loan when the property is sold or transferred. This provision protects the lender by preventing the new owner from taking over the existing mortgage under the old terms, which might be more favorable than current market rates.
Key Takeaways
- Purpose and Enforcement: A due-on-sale provision requires the full repayment of the outstanding mortgage upon the sale or transfer of the property, protecting lenders by aligning loans with current market rates.
- Trigger Events: This provision is activated by any change in ownership or interest in the property, including sales, inheritances, or gifts, without the lender's approval.
- Legal Framework: In the United States, the Garn-St. Germain Depository Institutions Act of 1982 outlines the legality of due-on-sale clauses and specifies certain situations in which they may not be enforceable.
- Implications for Borrowers and Sales: The clause impacts the assumability of mortgages and can influence property sales' structure and negotiation process, requiring borrowers to plan carefully for potential transfers.
Key Aspects of the Due-on-Sale Provision
- Triggering Events: The clause is triggered by any transfer of ownership or interest in the property, whether through sale, gifting, inheritance, or other means, without the lender's consent.
- Purpose: It allows lenders to ensure the loan is paid in full if the property changes hands, allowing them to reissue a mortgage at current interest rates to the new owners.
- Protection for Lenders: Enforcing the due-on-sale clause allows lenders to manage their risk more effectively. It prevents the assumption of the loan by someone who might not meet their lending criteria or benefit from an interest rate lower than the current rate.
- Regulation: The enforcement of due-on-sale provisions is governed by the Garn-St. Germain Depository Institutions Act of 1982 in the United States legally allows lenders to exercise this clause while providing certain exceptions under which the loan may not be called due.
Considerations for Borrowers
- Loan Assumability: Borrowers should be aware that a due-on-sale clause makes their mortgage non-assumable without the lender's permission, which can affect the sale or transfer of the property.
- Exceptions to the Rule: Certain transfers are protected from triggering the due-on-sale clause, such as transfers between family members upon death or divorce or the granting of a lease with a term that does not exceed three years and does not contain an option to purchase.
- Impact on Property Sales: The clause can influence the seller's flexibility in structuring the sale and may impact the negotiation process with potential buyers.
Conclusion
Understanding the due-on-sale provision is crucial for property owners and potential buyers, as it affects the terms under which a property can be sold or transferred and the financial obligations of all parties involved. It is a standard feature of most modern mortgages and aligns the loan terms with the current economic conditions and lending standards.
FAQs
1. Can I avoid triggering the due-on-sale provision if I add a family member to the property title?
Certain transfers, such as adding a relative to the property title, may not trigger the due-on-sale provision, depending on the specifics of the law and the mortgage agreement. It's important to consult with the lender or a legal professional before making such changes.
2. What happens if I transfer my property to a living trust?
Transferring property to a living trust where the borrower is and remains a beneficiary typically does not trigger the due-on-sale provision under exceptions provided by the Garn-St. Germain Act.
3. Can I negotiate to remove a due-on-sale clause from my mortgage agreement?
It is generally difficult to negotiate to remove a due-on-sale clause from a mortgage agreement after signing, as these clauses are standard practice to protect lenders' interests. However, borrowers can always discuss their needs and circumstances with their lenders.
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