Due on Sale Clause Exemptions
Question: After I was divorced three years ago, I purchased a home in Surprise. The title to the home was in my name only. Last year I married again and added my new wife to the title to the home. The mortgage loan, however, is still in my name. The mortgage payments are current. If the bank discovers that my new wife is on the title to the home, will the bank require immediate full payment of the mortgage loan?
Answer: Most mortgage loans have a “due on sale” clause allowing the mortgage lender to require immediate full payment of the mortgage loan upon any transfer of the title to the home. Federal law, however, prohibits most mortgage lenders from enforcing the “due on sale” clause after certain transfers of the title to the home [12 U.S.C. Section 1701j-3(d)(below)]; the due on sale clause exemptions. These exempt transfers of title to the home include a transfer to a living trust, a transfer pursuant to a divorce decree, a transfer after the borrower’s death to a relative of the borrower, and any transfer to a spouse or child of the borrower.
Therefore, when you added your new wife to the title to the home last year, the mortgage lender was prohibited from enforcing the “due on sale” clause to require immediate full payment of the mortgage loan because exemption number 6 listed below.
§ 1701j-3(d) Due on sale exemptions
1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
2) the creation of a purchase money security interest for household appliances;
3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
4) the granting of a leasehold interest of three years or less not containing an option to purchase;
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;
7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes 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.