The general rule is that a mortgage may not stay in a deceased person’s name, however exceptions may apply.
Generally, if a person dies, the title will transfer. If the title transfers, it invokes a due-on-sale clause.
“Due-on-sale” clauses can be fought with certain exemptions under federal law, including when property transfers to a spouse or child of the borrower on their death and the mortgage was on the family home.
The basics: a mortgage represents debt owed by a borrower that is secured (or “collateralized”) by real property that is, almost always, in the borrower’s name, such as the family home.
That debt is subject to a set of terms that are set out in at least two documents: a note and a mortgage. The “note” evidences the original debt (the loan) owed by the borrower or borrowers, and the mortgage is the document that secures that debt against the property and also, when recorded, tells the rest of the world that the lender (the person giving the borrower money or other value) has “dibs” (or a claim) on the property.
Most terms in the note and mortgage include what is called a “due-on-sale” clause. This type of clause says that if title to the property changes hands without the prior written consent of the lender, all of the debt still due will become “accelerated” and thus due and payable immediately. If that “accelerated” debt is not paid within the lender’s timeframe, then the lender has the right to initiate foreclosure to recover the debt through the forced sale of the property.
However, Congress, through what is called the Garn St. Germain Act, has made a few exceptions (legally called “exemptions”) to the enforcement of this “due-on-sale” clause to try and allow for American families to keep property “in the family” and encourage several efficient estate planning techniques that have the effect of reducing the burden on probate courts and preserving wealth in America.
These exceptions only apply to residential real property containing less than five dwelling units, ones that are designed for owner-occupancy, such as the family home. For example, if Mom and Dad bought a fourplex with a loan and mortgage and lived together in one unit of the four, these exceptions would apply to the entire mortgage on the fourplex, not just the unit they lived in.
How does the “due-on-sale” clause and its exceptions apply to mortgages in a deceased person’s name? Typically, after an individual passes, title will either be automatically transferred to the heirs of that individual (through what is known as survivorship provisions or transfer on death provisions), or will need to be transferred with help of the courts (typically called “probate”).
This title transfer will “activate” the due-on-sale clause in the mortgage unless an exemption applies. These exemptions under federal law are found in 12 U.S.C. § 1701j–3(d), which, as of the date of this publication, provides:
(d)Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
. . .
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
. . .
(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;
. . .
(8) a transfer into an inter vivos 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; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
. . .
In other words, as long as the home is the decedent’s residential property, such as a family home, and title to the home passes to a spouse or child of that decedent or meets another exemption above, the lender does not have the right to exercise the “due-on-sale” clause, and thus, as long as the other terms of the mortgage are met (usually, making the mortgage payments and keeping up with insurance and property taxes), then the mortgage may officially stay in the decedent’s name.
That being said, generally, if the property is commercial in nature (i.e. an investment property, even in a residential rental where the decedent did not permanently reside), these exemptions do not apply. If the property is not devised to a relative, these exemptions do not apply.
In addition, despite not having to do so, many relatives of decedents nevertheless choose to “assume” the mortgage with the lender on similar terms. Mortgage “assumption” means taking over the financial responsibility of debt that is owed by another.
Individual cases always vary, and your circumstances may have underlying facts or conditions that may affect whether a mortgage may stay in a decedent’s name. Schedule a consultation with an experienced real estate and probate attorney to determine whether an exemption to the “due-on-sale” clause applies.
Published: Jan 31, 2023
Updated: Jul 15, 2023
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