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:
The property concerned is residential property;
The property contains less than five dwelling units;
The transfer is to an inter vivos trust;
The borrower is a beneficiary of the trust; and
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.
If you'd like to discuss your options, please feel free to reach out to Erica at firstname.lastname@example.org!
Please note that this is not legal advice. If you have questions, please reach out to counsel licensed in your state.