‘Due on Sale’ Basics on Inheriting a Home with a Mortgage

What is ‘due on sale?’ Basically, it involves the inheritance of a mortgaged home from a deceased relative.

Losing a loved one is never easy. As well as getting used to not having that person around, you may find yourself with quite a lot of legalities to sort out. If your loved one owned their home, you might even find they’ve generously left it to you in their will.

But then, inheriting a house isn’t always smooth sailing. It can become a huge financial burden, depending on the circumstances.

If the home is already mortgaged, and there’s a balance outstanding, you may find that you have to pay off the rest of the loan in only a short time. The length of this period depends on the terms of the original mortgage agreement, and your relationship to the person you inherited the property from.

Figuring out the details

If you inherit a home with a mortgage, take a look at the mortgage documents the original owner signed when they bought the house. The records often include a clause called ‘due on sale,’ which states that the entire outstanding amount is immediately payable, if the property ownership transfers to someone else before the loan is paid.

The death of an original owner and the subsequent inheritance of the house constitutes a transfer of ownership. If a ‘due on sale’ clause is included in the contract, it may be triggered, and you may be made to either pay the amount or sell the property.

Does ‘due on sale’ affect you?

Federal law allows some exceptions to the ‘due on sale’ clause. The Garn-St Germain Depository Institutions Act of 1982 allows a close relative who inherits property to simply begin making regular payments on the mortgage and take ownership of the property, rather than having to pay off the whole loan right away.

Most commonly, if there’s a surviving partner or spouse who’s jointly named on the mortgage, they can also just take the mortgage on, and begin making solo payments on it.

‘Due on sale’ generally only comes into force when a non-relative inherits the property. However, most mortgage lenders will still allow most people to just assume the mortgage, provided they are financially able to make the payments.

If a mortgage lender wishes to enforce ‘due on sale,’ they have to give a 30-day ‘notice of acceleration’ to allow a minimum level of time to pay off the loan. For joint tenants or relatives named jointly on the mortgage, these mortgages can only be assumed in properties with five or fewer dwellings. If the property is an apartment building with more than five apartments, for example, ‘due on sale’ would be immediately enforceable even if a close relative inherited it.

Mortgage – in reverse

A reverse mortgage allows homeowners to receive cash for the equity in their home, and then repay the loan when they move out. If an owner with a reverse mortgage passes away, their estate must usually pay off the entire mortgage within six months. If you inherit a reverse-mortgaged home, you’ll likely have to clear the balance, sell the house, or try to get a new, standard mortgage to keep it.