Avoiding the Due-On-Sale Clause when Transferring a Mortgage in Divorce

Although the Divorce Decree may determine who retains ownership of the marital home after the divorce is final, it is important to understand that the Deed, Decree and Debt are three entirely separate issues to settle.

The Deed & Transferring Ownership | Transfer of ownership can simply be done with a Quitclaim Deed or other instrument. When both parties are co-mortgagees on the mortgage note, there is typically no further action needed when retaining the current mortgage as-is. However, it is important to take action and notify the current mortgagor of the ownership transfer to avoid an acceleration of the mortgage due to a transfer of ownership when the party who is retaining the home is not obligated on the current mortgage note.

The Garn-St Germain Depository Institutes Act of 1982 protects consumers from mortgage lenders enforcing the due-on-sale clauses of their mortgage loan documents when the transfer of ownership includes transfers to a spouse, or children of the borrower, transfers at divorce or death, the granting of a leasehold interest of three years or less not containing an option to purchase and the transfer into an inter vivos trust (or a living trust) where the borrower is a beneficiary.

When one spouse is awarded the martial home and ownership is transferred leaving the current mortgage intact, the receiving spouse is agreeing to take sole responsibility for the mortgage payments through the assumption process. A loan assumption allows a transfer of ownership and leaves the loan intact at the same interest rate, loan terms and balance.

Assumption & Release of Liability | When a former spouse assumes ownership of the home and the mortgage, this does not always mean the mortgage lender will release the original borrower from their financial obligation or liability on the mortgage. A loan assumption is a transaction in which a person (the “assumptor”) obtains an ownership interest in real property from another person and accepts responsibility for the terms, payments and obligations of that other person’s mortgage loan. The assumptor is liable for the outstanding obligations and unless a release of liability is requested, the original borrower will remain liable as well.

Reach out to a local Certified Divorce Lending Professional in your area to help understand how to avoid the acceleration of mortgage (Due-On-Sale) when transferring the mortgage and marital home in a divorce situation.

It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. To find a CDLP in your area, please click here.

This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.

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