Dangers of the Due on Transfer Clause

            To follow up on the same topic of the past two weeks, transferring the home, recently we received a call from George regarding the transfer of his home to a trust.  He received a letter from the bank holding his mortgage, stating something about the due on transfer clause.

            George still owes $100,000 on his mortgage.  The problem is that when the bank learned of the transfer of the home to a trust it informed him that he must pay off the mortgage in full.  But, didn’t I tell you last week that a transfer to a trust would have been a better solution for Jamie?

            Yes, but as you’ll see here, each situation has different considerations.  In Jamie’s case, her mom did not have a mortgage so we weren’t concerned with the issue that George is now facing.  So, what exactly is the due on transfer or due on sale clause?

            The clause provides that if you transfer ownership of your home without the bank’s approval, it can force you to pay back the entire mortgage balance immediately.  Federal law establishes certain limitations to the clause.  For example, banks can’t enforce the clause when one co-owner dies and the other co-owner takes ownership, when a relative inherits the property at death and then occupies the property or when a title is transferred to a living trust.

      Does this mean that George made a mistake?  Yes and no.  I’ll share that with you next week.