YOUR MORTGAGE : When a Non-Assumable Loan Is Assumable : Legal Rights: There are seven situations under a 1982 law when property can be transferred without need to refinance.
Your elderly father died, willing his home to you. It will be perfect for you and your family. But the mortgage lender says you can’t take over the 7% interest-rate mortgage. Don’t believe it.
Or imagine that you and your joint-tenant friend co-owner invested in property together. Your friend dies. The mortgage lender wants you to pay off the old 8% interest-rate mortgage. Don’t do it.
Suppose you and your spouse get a divorce and you receive title to the house. The lender insists that you pay off the old low-interest-rate mortgage. You don’t have to.
In the three situations above, thanks to the 1982 Garn-St. Germain Law, the lender cannot force the borrower to pay off the mortgage even if it contains a due on sale clause.
There are seven situations where a non-assumable mortgage can be assumed. If you know your legal rights, you can assume an existing mortgage without lender interference. Here are the seven most common situations where you can avoid paying off an existing mortgage:
When there is no due on sale clause. Many mortgage lenders instruct their loan service clerks to tell borrowers every existing mortgage cannot be assumed when a property title is transferred. This is not correct. The most obvious situation where a mortgage can be assumed by a new owner occurs when there is no due on sale clause. Always get a copy of the mortgage or trust deed to check if there is a due on sale clause. If there is none, the lender cannot demand payment when the property title is transferred.
When title is transferred by interhitance to a new owner-occupant relative. When a property owner dies, if a relative inherits the property and occupies it, the mortgage lender cannot enforce a due on sale clause. However, if the inheriting relative does not occupy the residence, then the lender can call the loan if it has a due on sale clause.
* When a surviving joint tenant takes over ownership. If one joint tenant co-owner dies, the mortgage lender cannot enforce a due on sale clause and demand that the surviving joint tenant pay off the mortgage. It doesn’t matter whether or not the joint tenants were relatives.
* When a new junior mortgage is recorded on the property. Surprisingly, many mortgages have a “due on encumbrance” clause that says the first mortgage lender can call the loan if a second mortgage is recorded on the property. But the Garn-St. Germain Law prohibits enforcement of such a clause.
* When a divorce results in transfer to either a spouse or an offspring. If a divorce results in a title transfer to either an owner-occupant ex-spouse or to children of the marriage, then the lender cannot enforce the due on sale clause.
* When property is leased for less than three years and there is no purchase option. Some due on sale clauses allow the lender to call the loan if the property is leased without the lender’s permission. However, the Garn-St. Germain Law bars lenders from enforcing such a clause if the lease is less than three years and the tenant does not have a purchase option.
* When title is transferred into an inter vivos living trust. For estate planning purposes and to avoid probate costs, many smart property owners place their properties in an inter vivos living trust. Such a title transfer will not trigger the due on sale clause when the borrower is the beneficiary and continues occupying the property.
Many mortgage lenders routinely tell borrowers their mortgage must be paid off when title to the property is transferred. But an advantageous existing mortgage can be called by the lender only if the situation does not fall into one of the circumstances outlined above. Further details are available from a real estate attorney.