Due on Sale Clause Explained: Protect Your Property from Unexpected Risks

Key Takeaways on the Due on Sale Clause

• Most residential mortgages contain a Due on Sale clause that can be triggered if you transfer ownership of your home without lender approval – even to a family member!
• Federal law provides exceptions for certain family transfers, such as placing the home in a revocable trust or transferring it upon death to a spouse or child who occupies the home.
• Transferring property without understanding your mortgage terms can result in the lender calling your loan due immediately. Always consult with a real estate attorney before making changes to the deed.

Florida homeowners often wish to transfer ownership of their real estate property for estate planning or asset protection purposes.

But if their property is encumbered by a mortgage, they may be unwittingly creating a bigger headache for themselves.

Many homeowners are surprised to learn that certain transfers, even to family members, may violate their mortgage agreement and lead to unintended consequences. These consequences are a result of a provision known as the Due on Sale clause contained in most mortgage agreements.

This article explains the Due on Sale clause and why it matters when transferring interest in real estate. It also explores some of the exceptions that may apply and common scenarios to be aware of to avoid triggering the clause.

What is the Due on Sale Clause in a Mortgage?

A Due on Sale clause, which is also to as the “acceleration clause”, is a standard provision found in most residential mortgage agreements.

This clause allows lenders to demand any outstanding principal balance owed on a loan to be repaid in full if the property is transferred to someone else without the lender’s consent.

For example: Many Florida homeowners with 30-year mortgages may choose to add their adult children to the title of their homes for estate planning purposes (check out our article to learn more about adding a name to a deed in Florida). Unless their mortgage contains a specific exception, such a transfer may trigger the Due on Sale clause and the lender may be able to call the entire loan due immediately.

What is the purpose of the Due on Sale Clause?

The Due on Sale clause serves to protect the lender and their investment in lending funds to the specific individual(s) approved for the loan. It is always in the lender’s best interest to know who owns the property subject to their loans and who will be responsible for repaying the loan. The clause allows Lenders to:

• Prevent transfers to borrowers who may not otherwise qualify for the loan and pose an unknown credit risk to the lender; and 
• Keep control over the mortgage terms and the originally approved borrower.

Does Every Mortgage Have a Due on Sale Clause?

Most mortgages, particularly those backed by Fannie Mae or Freddie Mac, as well as private lenders, will include a Due on Sale clause.

The language is usually buried deep within the body of the mortgage document and resembles language such as the following, which is typical of Fannie Mae/Freddie Mac documents:

“Transfer of the Property or a Beneficial Interest in Borrower.
If all or any part of the Property or any interest in the Property is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

 

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.”

It is imperative that borrowers speak with their lenders prior to signing their loan documents to determine if their mortgage contains a Due on Sale clause.

What Triggers the Due on Sale Clause?

While enforcing the Due on Sale clause is done at the option of the lender and not all transfers automatically lead to foreclosure action, it is important to know what may trigger the lender’s right to do so. The Due on Sale clause is triggered when a borrower does one of two things:

• When a borrower transfers legal ownership of the property, or
• When a borrower transfers beneficial interest of the property.

Examples of these two triggers are:

• Selling the property, even if for a nominal amount
• Adding someone to a deed
• Gifting the property to a family member, such as a child or a sibling
• Transferring the property to a trust (although, revocable living trusts can be exempt) or a limited liability company

What are the exceptions to enforcing the Due on Sale clause? 

Federal law, specifically the Garn-St. Germain Depository Institutions Act of 1982, exempt certain family-related transfers from triggering the clause. The following is a list of the most common exceptions to the Due on Sale clause:

• Transfer to a Living Trust – in situations where a property is transferred to a revocable living trust and the borrower remains the occupant of the property and the beneficiary of the trust, then the Due on Sale clause cannot be enforced. It is important to note that even though the transfer may not trigger the Due on Sale clause, the mortgage agreement itself may require the borrower to provide the lender with notice of such a transfer, and failing to provide such notice may lead to unintended consequences. 
• Transfer Upon Death of Borrower – generally, if an original borrower passes away and the property is inherited by a relative via will, trust or intestacy, then the lender will not enforce the Due on Sale clause if the relative occupies the home. While the lender may not accelerate the loan upon a transfer at death, the mortgage remains due and owing. Failure to pay the contractual rate may lead to foreclosure of the loan for non-payment.
• Transfer to Spouse or Child – while transferring property to an adult child during the life of the parent may still trigger the Due on Sale clause, federal law protects transfers to a spouse pursuant to divorce and transfers to a child upon the death of the borrower, particularly if the child occupies the residence.

Common transfers that may trigger the Due on Sale clause

It is important to note that the property does not need to be sold to trigger this clause. The following are a few common examples of when the Due on Sale clause may be affected and how to avoid any unintended consequences:

Scenario 1: Adding an Adult Child to the Deed

Many Florida homeowners elect to add their adult children to the deed of their homestead property to avoid the need for probate. Aside from the list of other reasons this may not be a favourable estate planning tool, such action may be considered a transfer of interest and trigger the clause even if the original borrower remains on the deed and the mortgage is being paid. A potentially better alternative may be to use a lady bird deed (also known as an enhanced life estate deed) instead. Such deeds delays the transfer until after death, thereby avoiding both probate and triggering the clause during the life of the borrower.

Scenario 2: Transferring to a Limited Liability Company

Transferring property from an individual to that of the individual’s limited liability company (LLC) is typically seen as a transfer of interest and will trigger the Due on Sale clause. The best way around triggering the clause in such a scenario would be to refinance the loan in the name of the LLC and then utilize an operating agreement and/or a trust to avoid probate.

What Happens If the Clause Is Triggered?

When a property transfer triggers the Due on Sale clause, the lender is usually entitled to accelerate the loan, requiring immediate payment of the full outstanding balance. If the borrower is unable to pay, then the lender may initiate foreclosure.

However, the enforceability of the clause may depend on the specific language of the mortgage agreement. For example, some clauses may require the lender’s consent for any transfer, while others may include explicit exceptions. 

Generally speaking, if a transfer violates the Due on Sale clause, the lender can:

1. Call the entire loan due immediately
2. Demand payment within 30 days
3. Begin foreclosure if the payment isn’t made

In practice, most lenders do not enforce the Due on Sale clause immediately upon discovering a transfer, especially if the loan is being paid on time. However, a lender is well within their rights to enforce the clause in accordance with the language contained in the mortgage. 

Way to Avoid Triggering the Due on Sale Clause

To ensure that you do not inadvertently trigger the Due on Sale clause, it is important to take the following steps:

• Review the mortgage agreement for its specific acceleration language
• Prior to making any transfer, it is advisable to speak with the lender to learn of any programs they offer that allow transfers without triggering the clause
• Seek assistance from a real estate attorney to interpret the mortgage agreement or to structure the transfer in such a way that the clause is not triggered
• Consider other legal tools that may not trigger the clause, such as Ladybird deeds or trusts 

Frequently Asked Questions

Conclusion: Protect Your Home, Your Family, and Your Finances

The Due on Sale clause is a hidden risk that few consider when conducting real estate transfers. It can be devastating to any borrower, particularly when the transfer is a result of estate planning and probate avoidance efforts. While some transfers to family members are exempt, many others can cause unexpected legal and financial trouble.

Given the gravity of the consequences of the Due on Sale clause, it is always advisable to obtain legal advice prior to making any transfer. The right planning not only helps avoid catastrophic consequences, such as foreclosure by triggering the clause, but may also help with:

• Maintaining control of one’s home
• Minimizing taxes and legal costs
• Providing for the long-term estate planning goals of the Florida homeowner

At ASR Law Firm, we help Florida homeowners protect their real estate, avoid probate, and understand their mortgage risks. To learn more about trust planning, Lady Bird deeds, or gifting your home to a loved one, contact us to schedule a complimentary consultation.