Question: My father owns our home, which was only put into his name because of my financial situation. My wife, two children and I live in the home, and since the house was purchased three years ago, I have made all of the mortgage payments, and have kept it in good shape.

I would like to have the house transferred to me and my wife, but my credit situation is still bad. Can I have the property transferred to me and my wife, and we will just assume my father's mortgage obligations? I have been told that a lender can use the "due on sale" clause in the mortgage documents and block this transaction. Can this happen?

Answer: The short answer is "no". Federal law permits certain transfers even though the loan documents contain the "due on sale" clause.

Let's look at this concept.

Assume that several years ago, your father purchased the property and obtained a mortgage with a very low interest rate -- say 6 percent. Assume now that mortgage rates are much higher, ranging around 10 percent. Mortgage lenders are in the business of making money, and obviously they do not like to allow people to assume a low interest rate when rates are much higher.

This scenario sounds unlikely in today's market place, but many readers will recall the excessively-high mortgage interest rates during the early 1980s, and early 1990s.

Thus, many years ago, the mortgage industry came up with the concept of "due on sale". Most mortgage loan documents contain language to the effect that if property which is secured by a mortgage is sold or transferred without the lender's prior written consent, the lender has the right to call the entire mortgage due, and insist on payment in full. This is known as the "due on sale" clause.

There has been much litigation over this concept throughout the country, and the great majority of the court cases have upheld the lender's right to enforce the due-on-sale concept.

In 1982, however, Congress enacted the Garn-St. Germain Act (12 UCA 1701j-3), which imposed certain restrictions on the enforcement of this clause. This law contains nine specific exemptions where a lender is not permitted to exercise its option pursuant to a due on sale clause. When there is a real property loan secured by a lien on residential real property containing less than five dwelling units -- including a lien on the stock of a cooperative housing corporation -- a lender could not enforce the due on sale clause under the following circumstances:

1. A transfer where the spouse or children of the borrower will become an owner of the property;

2. A transfer to a relative resulting from the death of a borrower;

3. A transfer by operation of law on the death of a joint tenant or tenant by the entirety;

4. 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;

5. 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 (i.e. the so-called "Living Trust");

6. The creation of a purchase money security interest for household appliances (i.e. where you pledge your house in order to purchase a refrigerator);

7. The granting of a leasehold interest of three years or less not containing an option to purchase;

8. A subordinate lien which does not involve a transfer of rights of occupancy in the property, and

9. Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

I highlighted your situation by listing it first on the list. Clearly, you would fall under the category of a transfer where the children of the borrower become an owner of the property.

However, here are some suggestions before you proceed to transfer the property into your name:

First, do you really want to do this? Have you considered the tax implications of the transfer.

Let's look at this example: your father purchased the house many years ago for $30,000 and it is now worth $300,000. On the transfer of the property, your tax basis will be your father's basis, and should you ever want to sell the property -- and depending on the tax laws in existence at that time -- you may have to pay a large capital gains tax.

Under current laws, if you and your wife file a joint tax return, you can exempt up to $500,000 profit, if you have owned and used the property for two out of the last 5 years prior to the sale.

However, there is no guarantee that this law will stay on the books and you should discuss your plans with your tax advisor.

Second, there will be some costs involved in this transfer. Generally, a transfer between parent and child is exempt from State transfer and recordation tax. But you will have to pay someone (usually an attorney licensed to practice law in the jurisdiction where your property is located) to prepare and record the deed. And there will be a nominal recording fee. Get a complete breakdown of all costs before you proceed.

Third, what is the current mortgage interest rate on the property? If it is higher than rates currently being charged, you might want to consider having your father refinance first, so as to take advantage of that lower rate. After that, you can have the property transferred into your name.

Finally, I strongly recommend that you advise your father's lender of your plans.

While they probably have no reason to challenge your decision, it is always best to keep the lender informed -- before you take any steps to change the ownership.

For more articles by Benny Kass, please press here.

Published: August 6, 2001

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