When a lender is restricted from calling a mortgage due

By Benny L. Kass
Saturday, February 13, 2010

Q: My wife and I are getting divorced. I am prepared to give her the family home so our children will not be disrupted. Our mortgage lender will not relieve me of our joint obligation to make the monthly payments, but I hope that will not be a problem. We have been told that a lender can use the "due on sale" clause in the mortgage documents to block this transaction. Can this happen?

A: The short answer is no. Federal law permits certain real estate transfers even though the loan documents contain the "due on sale" clause.

Let's look at this concept. Mortgage lenders are in the business of making money, and obviously, they do not like to allow people to assume a low interest rate when current rates are much higher.

This scenario sounds unlikely in today's market, but many readers will recall the excessively high mortgage interest rates in years past.

Thus, many years ago, the mortgage industry came up with the concept of "due on sale." Most mortgage documents contain language to the effect that if property secured by a mortgage is sold or transferred without the lender's prior written consent, the lender has the right to call the entire loan due and insist on payment in full.

There has been much litigation over this concept throughout the country, and the great majority of the court cases have upheld the lender's right to enforce the due-on-sale concept.

In 1982, however, Congress enacted the Garn-St. Germain Act, which imposed restrictions on the enforcement of this clause.

The law contains nine specific exemptions in which a lender is not permitted to exercise its option to call the mortgage due. When there is a loan secured by a lien on residential real property containing fewer than five dwelling units -- including a lien on the stock of a housing co-op -- a lender cannot enforce the due-on-sale clause under the following circumstances:

-- A transfer resulting from a decree of a dissolution of marriage or legal separation agreement, or from an incidental property settlement agreement by which the spouse of the borrower becomes an owner of the property.

-- A transfer in which the spouse or children of the borrower become an owner of the property.

-- A transfer to a relative resulting from the death of a borrower.

-- A transfer by operation of law on the death of a joint tenant or tenant by the entirety.

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