The provision in a standard mortgage contract known as a due-on-sale or acceleration clause gives a lender the right to demand full payment on the unpaid balance of a loan whenever a property is transferred or sold. This clause is standard for all mortgage contracts and its primary purpose is to protect lenders from below-market interest rates.

The Garn-St. Germain Depository Institutions Regulation Act (“Garn Act”) allows lenders to enforce due-on-sale clauses when a property title changes ownership. However, the Garn Act also protects homeowners from lenders seeking to enforce a due-on sale provision upon the transfer of property if certain criteria are met.

The Garn Act carves out the following exclusions from due-on sale provisions on property loans covering real property consisting of one to four residential units:

• Loans that do not include a due-on-sale provision (typically older FHA and VA home loans made prior to 1982);
• Creation of a junior lien exclusive of a land sale contract that is not related to a transfer of the right to occupy the property;
• Transfer of real property to a person currently occupying the property, or who will occupy the property, that results from (1) the death of the borrower, (2) a transfer to a spouse or children, or (3) a transfer that occurs due to separation, divorce or other agreement in which the borrower’s spouse becomes the owner of the property;
• Transfer of real property due to the death of a joint tenant or tenant by the entirety;
• Transfer of real property into a living trust where the borrower is the beneficiary and occupant; or
• Transfer of real property via the granting of a leasehold interest of less than three years that does not include a purchase option.

A due-on-sale provision for loans that do not fall into one of the exclusion categories above is enforceable. If a lender calls the loan due and payable following a transfer, that lender may elect to pay off the loan and initiate foreclosure proceedings.

When contract disputes arise, you need experienced legal representation and advice. Williams Commercial Law Group, L.L.P., is a law firm focusing on contract law, and business divorce. Contact us at (602) 256-9400 and schedule a time to meet with us today.