REAL ESTATE MATTERS For release 09/08/13
BC-glink 09/08 TMS Original
REAL ESTATE MATTERS For release 09/08/13
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Due-on-sale clause doesn't always force repayment of mortgage balance
Tribune Content Agency
By Ilyce Glink and Samuel J. Tamkin
Q: My mother is 93 and in failing health. She owns a home with a 20-year home equity loan, which, according to a disclosure agreement I found, will be in default at her passing.
I have power of attorney for her and I am executor of her will. The will allows my brother to live in the two-family home she owns as long as he maintains it. My brother has been my mother's main caretaker, and this is what the family has agreed to.
Here's the issue: According to the bank, if the title or deed to the home changes, it will also cause a default and the mortgage can be called in. What should I do to make sure my brother could stay in the home in the future?
My brother doesn't work and with his less than perfect credit history would never qualify for a mortgage. I really don't want to get a new mortgage to cover the property, but at the same time I want my brother to be able to continue to live in the house since he has sacrificed so much for my mother's care.
A: While your mother's home equity loan documents may contain a due-on-sale clause, the good news is you might not have to worry about this issue in your situation.
Usually, a due-on-sale clause is in loan documents to protect the lender from having a borrower sell a home without paying off the debt on a home. A lender is willing to lend money to a person based on his or her credit history, and the lender usually wants to know that the home is lived in by the borrower. Should that borrower sell the home, the lender wants the loan to be paid off.
If the lender failed to include the due-on-sale clause, a homeowner could sell the home and the lender would have no recourse but to keep the loan and work with the new buyer to be paid for what is still owed on the loan. The lender could still go after the original borrower, but lenders find it easier knowing that their borrowers live in the properties on which the bank has lent money.
However, given these circumstances, you could say that it's unfair to borrowers to force them to repay their loans upon the death of one of the owners, divorce, marriage or other estate planning situations. For this reason, the federal government passed a law back in the early 1980s that prevents lenders from calling in their loans and using that due-on-sale clause in various situations. This law is called the Garn-St. Germain Depository Institutions Act.
The law allows homeowners to place their homes into their own personal trusts without triggering the due-on-sale clause of their loans. For you, the more important aspect is that it prevents lenders from using that due-on-sale clause upon the death of an owner of a home and allows joint tenants, relatives, spouses, children and spouses whose ownership changes as a result of divorce to avoid a lender calling in the loan.
Now, if your mom's loan were a reverse mortgage, the rules would be different. In the case of a reverse mortgage, the lender has specific rights to recover the balance owed on a mortgage upon the death of the owner of the home.
You describe the loan as a home equity loan and not a reverse mortgage, and provided that's true, when your mom dies, you and your siblings should have the ability to transfer title as permitted under the will to you and your siblings, and your brother should be entitled to continue to live in the home, all without changing the current mortgage on the property.
However, you still have to make all of the regularly due payments to the lender along with maintaining appropriate insurance coverage for the home and making the required real estate tax payments.
Given this information, you might still want to talk to an estate attorney about having your mom's title to the home transferred into a living trust. When she sets up the trust, she would own it and control it. You could be the successor trustee or could even be a co-trustee with her. Upon her death, the trust could continue to own the property until you decide to sell the home and your brother decides to find a different place to live.
This is one option among many, and you might find it useful to talk to an attorney about these options.
(Ilyce R. Glink's latest book is "Buy, Close, Move In!" If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her website, www.thinkglink.com.)
(c) 2013 ILYCE R. GLINK and Samuel J. Tamkin. distriBUTED BY TRIBUNE CONTENT AGENCY, LLC.