A due-on-sale clause is a clause in a real estate loan agreement (mortgage, deed of trust, or real estate contract) that says the lender can demand full payment of the loan if the property is transferred.
Transfers can include sales, some lease-to-own agreements, transfer of a controlling interest in the entity that owns the property (such as a corporation), some transfers to trusts, and transfers to family or friends.
However, under federal law, lenders are prevented from enforcing a due-on-sale clauses under certain circumstances. Some such circumstances include:
- A transfer by devise, descent, or operation of law on the death of a joint tenant.
- A lease for less than three years that does not include an option to purchase.
- A transfer at death where the transferee is a person who occupies or will occupy the property, and is a relative of the deceased owner.
- A transfer where the spouse or child(ren) becomes an owner of the property following the owner’s death.
- A transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse becomes an owner of the property.
- A transfer to a trust as long as the person making the transfer is also the beneficiary of the trust. As a condition of this type of transaction, the lender can require assurances that the lender will be notified if the beneficiary is ever changed
Douglas N. Kiger, Attorney at Law
Blado Kiger Bolan, Tacoma, Wash