Due-On-Sale Clause: What is it and What do I Need to Know?
What is a Due-On-Sale Clause?
A Due-On-Sale Clause is a clause in almost every mortgage that allows a lender to demand payment of the loan in full in the event that the borrower sells or transfers the property to another person or entity without the lender's consent.
Will a Transfer to my LLC Trigger the Due-On-Sale Clause?
I often get asked by investor clients to transfer the property they just bought in their individual names to their LLC. Unfortunately, this can trigger the Due-On-Sale Clause and if a lender found out about this transfer, they could call the loan due in full.
With investor clients who purchase properties in their individual names, if their lender is unwilling to consent to a transfer to their LLC, I always recommend obtaining an umbrella insurance policy to protect them.
Will a Transfer to my Trust Trigger the Due-On-Sale Clause?
It depends. The Garn St. Germain Act protects debtors from the use of the Due-On-Sale Clause with certain transfers. One of these exceptions is an exception for transfers to trusts when the following criteria are met:
- 1. The property concerned is residential property;
- 2. The property contains less than five dwelling units;
- 3. The transfer is to an inter vivos trust;
- 4. The borrower is a beneficiary of the trust; and
- 5. The transfer does not relate to a transfer of rights of occupancy of the property.
There have been different interpretations of the fifth criteria, so it is important to speak to your attorney about this and what your best option may be. Generally speaking, if the property is a rental property, this exemption does not apply.
What Should I Do?
Before transferring your property, it is important to speak to an attorney to determine what makes the most sense for you and to ensure that any transfer you make won't trigger the Due-On-Sale Clause in your mortgage.
Please note nothing in this article is meant to be legal advice and you should seek counsel from an attorney licensed in your state if you have questions.
Comments (3)
Thank you for your article. I'm trying to understand what you actually wrote. You said this:
"Generally speaking, if the property is a rental property, this exemption does not apply."
OK, then, what does that mean? Does that mean that if the property is less than 5 units and IS a rental property that:
a.) you CAN do the transfer without triggering the due-on-sale clause, or
b.) the transfer WILL trigger the due-on-sale clause
Thank you very much
David Straley, over 1 year ago
I apologize. I am just now seeing this comment. If the property is note owner-occupied, it does not qualify for the exemption.
If you read the terms of your mortgage, some do include a 30-day cure period, so if you transfer to an LLC and the lender discovers this, they may give you thirty days to cure this by putting the property back into your name. Not all mortgages read this way, however.
Erica Larence-Penna, about 1 year ago
Thank you for your article. I'm trying to understand what you actually wrote. You said this:
"Generally speaking, if the property is a rental property, this exemption does not apply."
OK, then, what does that mean? Does that mean that if the property is less than 5 units and is a rental property that:
a.) Clause 5 has been met (i.e. "The transfer does NOT relate to ....") or
b.) Clause 5 has NOT been met, i.e. "The transfer DOES relate to ..."
Thank you very much
David Straley, over 1 year ago