When purchasing a home together with a spouse, business partner, friend, or other family member, a common decision that must be made at the time of purchase is which individuals or entities will hold legal title to the property. Generally, the person or persons borrowing the funds to purchase the property ends up with legal title to the property.
However, circumstances change and often current and prospective clients ask us to prepare deeds in order to add or remove persons “from the deed,” or in other words, change who holds legal title to real property. (For further discussion on different types of deeds, follow this link). A fact many property owners don’t know is that if there is a mortgage on their property, more than likely it contains a due-on-sale clause. A due-on-sale clause is a clause within the mortgage instrument that states that a transfer of an interest in the property will constitute a default under the mortgage loan. The lender may, but is not obligated to, declare the full balance immediately due and payable in this situation.
To avoid this problem with the lender, a borrower can seek prior approval of the transfer. This may require underwriting approval of the transferee, and a borrower may find that their lender will not approve any transfer. However, to the benefit of persons making certain transfers, the Garn–St. Germain Depository Institutions Act of 1982 created a number of exceptions to the enforceability of due-on-sale clauses, including, but not limited to, transfers to a spouse, to an ex-spouse as part of a divorce, and to certain transfers into a trust in which the borrower is also a beneficiary.
For more information about due-on-sale clauses and how they may affect you, please contact a real estate attorney.