Navigating the Due-on-Sale Clause: A Guide
If you own property in Florida and are exploring creative ways to transfer ownership while carrying an existing mortgage, you may encounter a potential roadblock: the due-on-sale clause. This clause, found in most mortgage agreements, gives your lender the right to demand full repayment of the loan if the property is sold or transferred without their consent. Understanding how this clause works and how it applies to specific scenarios is crucial to avoid financial pitfalls.
What is the Due-On-Sale Clause?
The due-on-sale clause is a legal provision in your mortgage agreement designed to protect the lender’s interest. It prevents borrowers from transferring ownership of the property to another party without notifying the lender. Under the Garn-St. Germain Depository Institutions Act of 1982, certain transfers are exempt from triggering the due-on-sale clause. For example, you can:
Transfer property to a spouse or child.
Place the property in a revocable trust for estate planning purposes, provided you remain the beneficiary and occupant.
Transfer ownership due to divorce or death.
However, not all transfers are protected under this law, which brings us to a common scenario involving land trusts.
A land trust is a legal tool often used in Florida for privacy and estate planning. When you transfer property into a land trust, the title is held by the trust, but you (as the owner) retain the beneficial interest, which means you control and benefit from the property. As long as you are the sole beneficiary of the land trust, this transfer is generally exempt from triggering the due-on-sale clause under the Garn-St. Germain Act. However, complications arise when you assign the beneficial interest to another party.
Assigning Beneficial Interest: A Risky Move
Assigning the beneficial interest of a land trust to someone else is essentially transferring ownership of the property. Even though the title remains with the trust, the new beneficiary now controls the property. This is where the due-on-sale clause comes into play.
Example 1: Transferring Beneficial Interest Without Lender Consent
Jason owns a property in Orlando, Florida, with a mortgage that includes a due-on-sale clause. For privacy reasons, he transfers the property into a land trust with himself as the sole beneficiary. So far, this does not trigger the due-on-sale clause.
Later, Jason decides to assign the beneficial interest in the trust to Sarah, who agrees to take over the mortgage payments. Despite no formal title transfer, this assignment changes the ownership structure. If the lender discovers the transfer, they may invoke the due-on-sale clause and demand immediate repayment of the loan balance.
Example 2: The Lender’s Response
Sarah continues making timely mortgage payments, either directly or to Jason, and the lender initially remains unaware of the transfer. However, during a routine title search (e.g., when Sarah applies for homeowner’s insurance or tries to refinance), the lender learns about the change in beneficial interest. They send Jason a notice requiring full repayment of the loan within thirty (30) days. Jason and Sarah are now in a difficult position: either pay off the loan or risk foreclosure.
Why Lenders Care About the Due-On-Sale Clause
Lenders rely on the due-on-sale clause to:
Ensure the borrower’s financial stability aligns with the terms of the loan.
Avoid situations where the new “owner” might be less creditworthy.
Maintain control over the property securing the loan.
From the lender’s perspective, unauthorized transfers increase the risk of default, even if payments are current.
How to Mitigate the Risks
If you are considering transferring property to a land trust or assigning the beneficial interest, here are steps you can take:
Consult with an Attorney: Speak with a Florida real estate attorney to review your mortgage agreement and understand your options.
Seek Lender Approval: While lenders rarely grant permission for such transfers, asking upfront can help you avoid unexpected consequences.
Consider Alternative Strategies: If your goal is to sell or transfer the property, explore traditional methods like owner financing or assumption of the mortgage (if allowed).
Be Transparent: Concealing the transfer might work temporarily, but the lender is likely to discover it eventually. Transparency minimizes long-term risks.
Transferring a mortgaged property to a land trust and assigning the beneficial interest can seem like an attractive strategy for privacy, estate planning, or id you are looking for a quick sale. However, it’s essential to understand how the due-on-sale clause applies and the potential consequences of triggering it. If you’re in this situation, consult with a qualified real estate attorney in Florida to ensure your actions comply with the law and your mortgage agreement. Contact the team at Cornerstone Law Firm if you would like to discuss how taking the right steps now can save you significant financial and legal headaches down the road.