When property with a mortgage changes ownership, lenders often have the right to enforce a “due-on-sale” clause. This clause lets lenders demand full repayment of the loan if ownership is transferred, typically to protect their financial interest. However, the Garn-St. Germain Depository Institutions Act of 1982 offers crucial protections by limiting when lenders can enforce this clause.
Understanding the Due-on-Sale Clause
Most mortgage contracts include a due-on-sale (also called acceleration) clause that triggers when the borrower transfers the title to another party. This usually requires paying off the loan in full immediately. For example, if you sell your home, the lender expects the mortgage to be paid off from the sale proceeds. However, this clause can create challenges during transfers not involving traditional sales, like inheritance or divorce.
Learn more about this in our article on the Mortgage Acceleration Clause.
Garn-St. Germain Act’s Purpose
Amid rising interest rates in the early 1980s, the Garn-St. Germain Act balanced lenders’ rights to enforce due-on-sale clauses with consumer protections. It gave lenders the federal authority to enforce these clauses uniformly, overriding conflicting state laws. More importantly, it carved out explicit exceptions allowing certain transfers without triggering full loan repayment demands.
Key Exceptions that Protect Homeowners
Under the Garn-St. Germain Act, lenders cannot call a loan due upon transfer of property ownership in these typical situations:
- Transfer to a Spouse or Child: For estate planning or family transfers, allowing loan assumption.
- Transfer via Divorce or Legal Separation: Property transferred between ex-spouses is protected.
- Inheritance: Property passed to heirs after a borrower’s death.
- Transfer to a Living Trust: When a borrower places their home in a living trust and remains a beneficiary.
- Subordinate Liens: Borrowers obtaining junior liens like home equity loans without triggering the due-on-sale clause.
This means you can usually maintain the original mortgage terms, including interest rate and payment schedule, avoiding costly refinancing.
Explore related topics like Loan Assumption and Assumption Fee.
Practical Example
Imagine Sarah inherits her family home with a 3.5% mortgage. Without Garn-St. Germain protections, the lender could demand immediate repayment, forcing Sarah to refinance at a higher current rate. Under the Act, Sarah can assume the existing mortgage, keeping favorable terms and monthly payments.
Steps to Take When Transferring Ownership
While the Act provides protections, it’s not fully automatic:
- Notify Your Lender: Inform the mortgage servicer of the transfer promptly and submit required documents like a death certificate or divorce decree.
- Creditworthiness Review: The lender can require proof you can afford the payments to approve the mortgage assumption.
- Formal Assumption: Upon approval, sign paperwork to assume responsibility for the mortgage.
FAQs
Q: Can a lender deny a mortgage assumption under this Act?
A: Lenders cannot enforce the due-on-sale clause solely because of the transfer, but they can deny assumption if the new owner fails creditworthiness standards.
Q: Does the Act cover all types of mortgages?
A: The Act primarily covers residential mortgages on properties with one to four dwelling units.
Q: What if I’m added to a parent’s home title?
A: Adding a child to the title is generally protected under the Act, but confirm with your lender or a real estate attorney.
For authoritative information, see 12 U.S. Code § 1701j–3 and guidance from the Consumer Financial Protection Bureau.
This law is a critical resource for those navigating mortgage obligations during life changes, helping preserve favorable loan terms and avoid costly refinancing.
