When Is a Mortgage ‘Due on Sale’ Clause Triggered?

Question: Last week we went to an estate planning seminar in our Litchfield Park community center. We now have the forms to transfer our home to a Revocable Living Trust (“RLT”). Our home, however, still has a $220,000 mortgage. In reviewing this $220,000 mortgage, there is a “due on sale clause” in the mortgage that requires us to pay off this $220,000 mortgage if we transfer the title to our home. Is that “due on sale clause” enforceable if we transfer the home into our RLT?

Answer: Probably not. Most mortgages (called “deeds of trusts” in Arizona) have a “due on sale clause” that allows the lender to demand full payment of the mortgage upon transfer of title to the home. Under a federal law, however, there are numerous exceptions, e.g., transfer by divorce, by inheritance, and by gift to a child. 12 U.S.C. § 1701J-3. Another exception, applicable to your Sun City West home, is a transfer to an RLT.

Note: Even if a transfer of a home is not protected by federal law, e.g., a transfer of one-half of the title to the home to a girlfriend or boyfriend, most mortgage lenders never discover the transfer of title, and even then don’t do anything, as long as the mortgage payments are made. Some private mortgage lenders, however, who discover the transfer of title may demand an increase in the interest rate and a small transfer fee to cover the cost of the transfer paperwork.