Can a Lender Force You to Pay-up or Refinance a Home Mortgage After Your Relative Dies?

One question we frequently get is what happens to a home mortgage after my relative (usually mom or dad) dies? The Garn-St. Germain Depository Institutions Act of 1982 addresses so-called due on sale clauses. Specifically, at 12 U.S.C. § 1701j–3(d), the Act provides:

With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—

(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation  agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

This means that if you inherit property subject to a mortgage, the lender cannot immediately force you to pay off or refinance the mortgage. It also means if you transfer property to a trust created during your lifetime, the lender cannot force you to pay off or refinance the mortgage as long as you’re a trust beneficiary and you retain the right to occupy the home. This restriction also applies if you inherit property under a survivorship deed. These limitations apply to traditional loans, not reverse mortgages. Even where due on sale clauses can be enforced, the law provides that lenders are ” encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.” See 12 U.S.C. § 1701j–3(b)(c).

Since this law has been around since 1982 (more than 40 years), most banks are more concerned about getting paid than they are enforcing a due on sale clause. The key, in most cases, is don’t miss a payment.