When I transfer my residence into the name of my trust, how will it affect my mortgage?

If you take a look at your mortgage paperwork, you may notice a clause stating that if your property is sold or otherwise transferred during the term of the mortgage the entire principal balance will become immediately due.  This is called a “due-on-sale” clause, and it has generated more than a few panicked phone calls from clients over the years fearful that the transfer of property into their trust was going to cause their mortgage to be called due.

The Garn-St. Germain Depository Institutions Act of 1982

“The Act” is federal law that affirms the validity of due-on-sale clauses and allows lenders to include due-on-sale clauses into their loan contracts and to enforce them. 

The Act was passed in response to high inflation in the US economy during the 1970s. Many state laws disallowed due-on-sale clauses, and this allowed the seller of property to transfer property and their low-rate mortgages to buyers at far-below market interest rates. To combat the effect that this was having on the economy, the Act was intended to override state law that prevented lenders from enforcing these due-on-sale clauses.

Some Important Exceptions

However, it carved out some important exceptions when it came to mortgage loans securing residential real property and manufactured homes (meaning residential real property containing less than five dwelling units).  In the case of a residential mortgage, lenders are not permitted to enforce a due-on-sale clause in any of the following specific circumstances:

1. taking out a subordinate or junior lien against the residence to secure a loan that does not transfer the right to occupy the property;
2. the creation of a lien or security interest against the residence for household appliances;
3. a transfer to a surviving joint tenant or tenant by the entirety at the death of a tenant (including community property);
4. a lease for less than 3 years that does not give an option to purchase the property;
5. a transfer to a relative resulting from the death of a borrower;
6. a transfer where a spouse or child of the borrower becomes an owner of the residence;
7. a transfer to a spouse following divorce or legal separation;
8. a transfer into a living trust of which the borrower is and remains a beneficiary.

In Summary

During the life of the borrower the transfer of an interest in the borrower’s residence to a spouse, child or to a typical revocable living trust will not result in the mortgage being called due. 

At the borrower’s death, the transfer of the property to a surviving joint tenant or to a relative through a trust, will or by intestate succession will not cause the mortgage to be called due.  The receiving spouse, child or relative can continue to pay the mortgage, and the lender cannot call the loan due and force a sale, provided that the loan continues to be paid. 

It should be noted that this does not apply to reverse mortgages, which operate under a different set of rules.