Dan Marchiando's Mortgage News Blog

Do I Need to Refinance Property that I Acquire through Inheritance, Family Transfer, or Divorce?

October 9th, 2013 7:34 PM by Dan Marchiando

A question that I often hear from people about mortgage loans, is whether someone can take over the payments on another person’s mortgage, especially when a property is inherited from a parent. Generally speaking, most residential mortgage loans have what is called a “Due-on-Sale Clause”, which prevents just anyone from taking over payments on another person’s mortgage loan when the property is sold or otherwise transferred to another person. This part of the mortgage contract allows the lender of the money to immediately demand payment of the whole mortgage principal and interest balance. Being in breach of the Due-on-Sale Clause allows the lender to use the foreclosure process to enforce the immediate repayment of the mortgage loan.

However, in 1982, the Garn-St. Germain Act was passed, and later codified into U.S. Code Title 12 – Banks and Banking; Chapter 13 – National Housing; § (Section) 1701j–3. Preemption of due-on-sale prohibitions.

This federal law created very specific and consumer-friendly legal exemptions to the typical “Due-on-Sale Clauses” that lenders put into mortgage loan contracts. These exemptions ONLY apply to residential properties, which are comprised of one to four units. The property needs to be residential, but it does not need to be occupied by the giver or the receiver as their primary residence. There are 9 exemptions, and the most important ones of interest to the average homeowner would be these:

. . . lender may not exercise its option pursuant to a due-on-sale clause  upon—

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) 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;

(8) a transfer into an inter vivos trust (“living 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;

Acquiring a property through inheritance, family transfer, or divorce, while using the protections of this law, does not mean that the person is formally “assuming” the obligations of the mortgage. However, the person acquiring the property would most likely be financially motivated to continue making the mortgage payments so as to not lose the property through foreclosure, due to payment default.

This matter is fairly complicated, and there are a large number of variables to be considered. This article and the information contained herein is provided for informational purposes and is not legal advice. Readers should not act upon any information contained in this information without first seeking the assistance of legal counsel who will apply the applicable law to your specific circumstances.

Thanks for your interest.

Dan

Posted in:General
Posted by Dan Marchiando on October 9th, 2013 7:34 PM