Breaking up is Hard to Do: Due on Sale Clauses

Buying a home is an important step in life. Most of the time, people do not purchase real property on their own but rather enlist their spouse, life partner or a closest friends and family to share the responsibilities, obligations and enjoyment surrounding this all important purchase. It represents a life change, a movement forward and as well as a prudent investment. 

While sharing the expenses, the space itself and the responsibilities can be both rewarding and a great step towards the future, the question remains what happens when the underlying relationship goes south. Many of the clients coming to my practice seeking representation for refinances are in need of assistance based upon a souring of a relationship, a divorce or a mutual decision to part ways.  But is a refinance always necessary when removing a party from a deed? And if so, why? 

The simple answer is yes, if there is a mortgage loan. At closing, if the buyers are financing the property and require the assistance of a mortgage, there is a note and mortgage that are signed in furtherance of the loan. Within most standard Notes, the following language is found: 

If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

Such provision is known as a Due On Sale Clause, requiring that upon the transferring of ownership or if there is a sale of the property, the loan may be accelerated, requiring the owner to pay the loan debt in full. Typically in order to pay the loan in full, the remaining owner will be required to refinance, paying off the original loan and taking out a new loan under the new deed. If the remaining owner needed to take out additional equity from the property to pay the former owner in consideration of being removed from the deed, refinancing would make sense. However, if no additional equity is needed and there is no other incentive to refinance such as a lower interest rate, the additional closing costs required to abide by the due upon sale provision can be quite problematic. 

If we look closer at the standard provision quoted above, there appears to be some conditions in which a due upon sale clause will not be enforceable. Pursuant to federal law and case law, there are circumstances in which the due upon sale clause can be circumvented. Some of those circumstances include but are not limited to transfer of a property to a spouse or child of the owner, transfer to an intervivos trust and transfer based upon a divorce decree.