Question: In a recent column you wrote about a mother being able to transfer her Sun City home to her daughter either by beneficiary deed or by a small probate affidavit. If there is a mortgage on the Sun City home at the time of the mother’s death, will the daughter have to pay off the mortgage immediately?
Answer: Probably not. Although most mortgages have a standard due-on-sale clause that requires the mortgage balance to be paid off immediately upon any transfer of the home, most mortgages are governed by federal law. Under federal law a mortgage lender cannot accelerate the mortgage balance in certain circumstances, including upon the death of the borrower if the transfer of the home is to a relative of the borrower and the inheriting relative occupies the home. Therefore, after the death of the mother, the daughter as the new owner should be able to move into the home and continue to make the regular monthly payments for the mortgage.
It is not necessary for a relative of a deceased borrower to refinance the mortgage or even assume it. Simply notify the mortgage lender about the inheritance, state that the possession or occupancy of the home will remain with the relative, and all future mortgage payments will be made by the relative. Then, after the probate procedure is complete, the relative should obtain a new deed in their own name.
Note: Under the Garn-St. Germain Act of 1982, creditors may not exercise the due-on-sale clause in a mortgage based upon certain “non-substantive” or “non-sale” transfers of the real property, including the transfer mentioned above: to a relative currently occupying, or, upon the death of the borrower, will occupy the property. The Garn-St. Germain Act lists many other “non-sale” transfers, including:
- a transfer during the life of a borrower to a spouse or child;
- a transfer through a divorce;
- a transfer into a borrower’s living trust;
- a transfer upon death of a joint tenant;
- the granting of a leasehold interest of three years or less and without a lease-to-purchase option; or
- the creation of a junior lien or other encumbrance subordinate to the lender’s security instrument that is not related to a transfer of the right to occupy the property.
Note#2: The Garn-St. Germain Act refers exclusively to real property loans on residential dwellings of 4 units or less.