Will My Children Owe Mortgage Balance In Full When I Die?

Question: I own three rental properties in Surprise. Each one has a bank mortgage with a “due on sale” clause, i.e., the mortgage must be paid in full upon any transfer of the rental property. My revocable living trust states that my three children become the owners of these three rental properties upon my death. Will the “due on sale” clause in each of these mortgages require my children to pay the entire mortgage balances on these rental homes when I die?

Answer: No. Under a 1982 federal law there are exceptions to the enforcement by mortgage lenders of standard “due on sale” clauses in most mortgages. One exception is a transfer of the property upon death. Another exception is a transfer during lifetime by a homeowner of the property to a spouse or children. As a practical matter, however, most mortgage lenders just want the monthly mortgage payments and, even if there is no exemption, rarely enforce a “due on sale” clause.

Note: Private loans such as seller carryback financing can enforce a “due on sale” clause.