Transferring a Deed Before the Loan Is Paid Off? Be Mindful of the “Due-on-Sale” Clause

Are you thinking of transferring your deed? You might be quitclaiming the deed to someone you know, or you might be transferring it into a company or trust. Or you might be getting ready to sell. In all of these cases, check the rules on your home loan.

If you have a conventional mortgage loan on the home, you should see a “due-on-sale clause” (a.k.a. “alienation clause”) somewhere in the lengthy text of your mortgage agreement.

How Does the Due-on-Sale Clause Work?

If you transfer your house or condo before the mortgage is paid off, the county Recorder of Deeds makes your title transfer a matter of public record. The lender will be notified. What will the lender do?

As you know, your home is collateral for the funds you’ve borrowed. When the deed changes, so does the lender’s collateral. When a borrower transfers control of the loan collateral, the lender has a good reason to ask for immediate repayment of what’s left of the loan.

So, if your deed transfer trips the wire and activates the due-on-sale clause, your mortgage company has the ability to insist on a full and immediate loan payoff. This is how a due-on-sale clause can unexpectedly force a borrower to find new lending sources or possibly even face a foreclosure. Yes, a mortgage borrower could be classified as in default for acting against the loan’s contractual obligations.

Not every type of deed transfer makes a loan come due immediately, though. Transferring a deed as a gift to someone in your family might or might not trigger the clause. Same with transferring the deed into a trust. The mortgage agreement tells you what you can and can’t do if you want to keep a loan in place. Your mortgage company’s rep can look at your loan and tell you if the clause is in there.

While the lender might want to accelerate the loan right away, it also might decide to let the new deed holder keep paying. Maybe, for example, the loan has a hefty interest rate and it’s in the lender’s best interest not to demand immediate repayment.

Exceptions to Due-on-Sale?  

Some loans, like FHA loans, don’t force repayment upon a deed transfer. These are called assumable loans. With these, the deed may be transferred and the next owner may keep the mortgage and its rate and terms, subject to the lender’s approval. For a loan to be assumable is a great selling point, if the borrower got it when rates were at bargain-basement prices.

Even if your loan is conventional, and has the clause, you might be able to hold the mortgage in place if your deed transfer is to:

• Your spouse, life partner, or child.

• A person currently living in the home.

• A joint tenant who hopes to keep living in the home and take on the mortgage.  

• A former spouse or partner, under a court-supervised property division.

• Your revocable (living) trust. Note: In most states, you cannot put real estate into a trust for the purpose of getting around a due-on-sale clause and reselling the property. Creative “workarounds” are usually contract violations that put you at risk of foreclosure.

• An heir, when you pass on.

When a deed holder dies, the heir might agree with the lender to take over the payments on behalf of the deceased. Lenders vet the heirs’ financial situations before allowing this.

Important note: To confirm what will happen when you transfer the deed, call the mortgage company first. Be sure the lender greenlights your decision to convey the home’s title. Even if you have heard enforcement of this clause is rare, why tempt fate? Interest rates are substantially higher than  they were several years ago. So, lenders are watching for people who try to hold onto (especially) low-interest loans.

What About Transferring Your Deed Into Your Business?

Use caution if you’re transferring your property into your LLC. Be sure your lender knows (a) you intend to make the transfer; and (b) whether you intend to use a quitclaim, a limited warranty deed, or a general warranty deed. Keep in mind:

• Your insurance policy has to name your business if your business receives and holds the deed.

• When you get a reissued policy under the business name, your mortgage company gets notification of the transfer.  

• A lender could consider the shift in title a risk for potential bankruptcy. As the property’s risk profile has changed, the deed transfer could be a violation of your mortgage agreement.

Lenders need to avoid risks that were unknown to the original underwriter. Otherwise, the loan becomes less marketable for the lender.

Other Points to Ponder

Taxes and insurance can also be impacted by a deed transfer, of course. Not only the loan is at issue.

On the other hand, refinancing or getting a loan modification won’t implicate the due-on-sale clause. The clause is only triggered by a title transfer. Does this mean the due-on-sale clause comes into play when you sell a home? It does. You may not sell your home until you have arranged for either:

• An assumption of the mortgage; or

• Full payoff of the mortgage loan.

Unless your loan is assumable, you must have the lender’s go-ahead to sell, or you could put yourself at risk of mortgage foreclosure. You have to agree to use your sale proceeds for your final payoff. If the buyer needs financing, that’s on them. A buyer must qualify for a new loan at the current interest rate.

You also need to be concerned whenever someone places a lien on your home in addition to your original mortgage. This, too, changes the collateral held by your lender, and can trigger acceleration of your repayment responsibility.

What else might trip the due-on-sale wire? If you stop paying on your homeowner’s insurance or your local property taxes, you could be at risk of the lender calling the mortgage due. Going into bankruptcy could also prompt a call for immediate repayment.

And There You Have It.

A due-on-sale clause appears in many mortgages — but not all. Government-backed loans are typically assumable, meaning the next buyer could take over a current loan with the lender’s OK.

Review the terms of the mortgage agreement to determine if a due-on-sale clause is in yours, or call your mortgage servicer’s number and ask. It’s a standard clause in today’s conventional mortgage contracts. But in unusual circumstances, such as a deed holder’s death or divorce, a mortgage company typically offers options for the person who stays in the home.

If you don’t get the lender on your side, though, you could be forced to undo the transfer you made. Or you could find yourself in a foreclosure action. Remember: When in doubt, check things out with your mortgage company.