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San Antonio, TX Family Law and Military Divorce Blog

Friday, February 28, 2014

Dreaded "Due-on-Sale" Clause

Anyone who has actually read their Deed of Trust (commonly called "the mortgage") noticed the dreaded "due-on-sale" clause.  Due-on-sale clauses are intended to stack the deck in favor of lenders. In simple terms, a due on sale clause gives lenders the right to accelerate or "call" the note and demand full payment of the debt any time the homeowner/debtor transfers his or her interest in the home.  If nothing else, these clauses facilitate lenders in collecting another set of handsome fees whenever they approve loan assumptions (but that's another story).  Awareness of the due on sale clause's effect causes many people to fear what might occur in three common situations:

  1. when the homeowner transfers the home into his or her own living trust;
  2. when the homeowner/spouse transfers his or her interest to the other spouse in divorce as part of a court-ordered division of property; and,
  3. when the homeowner/decedent transfers his or her interest to a relative after death either through a Will, Trust, or by the laws of intestate distribution for those who die without a Will or Trust. 

Despite lenders' efforts to stack the deck in their own favor, all is not lost.  U.S. laws affecting banks and banking contain a specific list of transactions in which lenders are prohibited from exercising their rights under  due-on-sale clauses.  The list is set for in 12 U.S.C. § 1701J-3(d).  Our three common situations noted above are among that list.  So, lenders cannot exercise a due-on-sale clause when a homeowner transfers the home into his or her own inter vivos (living) trust.  Next, lenders cannot exercise a due-on-sale clause when one spouse transfers his or her interest to the other spouse in divorce as part of a court-ordered division of property.  Finally, lenders cannot exercise a due-on-sale clause when the owner/decedent transfers his or her interest to a relative after death either through a Will, Trust, or by the laws of intestate distribution for those who die without a Will or Trust.  That's good news for the homeowner/debtor.  The banks and other lenders don't hold all the cards.  By the way, if you weren't aware of due-on-sale clauses because you've never read your Deed of Trust, now would be a good time to do so.  

Author Jim Cramp is the founder and principal attorney at the Cramp Law Firm.  The Cramp Law Firm provides a spectrum of family-related legal services in the greater San Antonio Region.


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