Prior to the 1980s you could take over the loan on just about any property transferred in any number of ways, regardless of your relationship to the former property owner. As interest rates increased in the '80s, banks started the practice of inserting "due-on-sale" clauses in their loans. When a property changed hands, the loan was due. There is a law, however, that exempts spouses and children from the due-on-sale clause.
Garn-St.Germain
The Garn St. Germain Depository Institutions Act of 1982 legally recognized the right of banks to place and enforce due-on-sale clauses on their loans. This law also included several exceptions for property transferred by court order in a divorce settlement, property transferred into a trust in which the borrower is the beneficiary and property transferred to a child or spouse after death. In all these cases the new property owner may take over the existing loan. The due-on-sale clause is void.
Talk to the Lender
To avoid receiving a demand notice sometime down the line, once you have received your parent's death certificate and gathered proof, such as a birth certificate, that you are the property owner's child, and the property changed hands from your parent to you, contact your lender to have the mortgage changed from your parent's name to yours. It or any future loan servicer, should the loan be sold, will have no other way of knowing you are entitled to an exception to the due-on-sale clause.
Pay the Mortgage
The exception in the Garn-St.Germain Act allows you to take over the loan but it does not relieve you from paying the loan. If your parent did not make mortgage payments for some period of time before his death, you must make those repayments as soon as possible. The lender makes no distinction between the various parties involved with a mortgage and their ability to make the payments. Even though you are not the one who signed the loan agreement, you are the one responsible for payments if you do not want to risk a foreclosure.
Other Options
The exception in the Garn-St. Germain Act does not require you to take over the loan or to stay in it through its full amortization period. Unless there is a prepayment penalty associated with the mortgage, you can pay off the loan at any time by either refinancing the loan or selling. The reason for the exception was to prevent sales in cases in which the child could afford to make the mortgage payment but could not qualify for a new loan.
Tags: property transferred, your parent, due-on-sale clause, Garn-St Germain, over loan, property owner