State-chartered banks may no longer exercise residential mortgage “due on sale” clauses upon the borrower’s death or inter-family transfers. A mortgage “due on sale” clause requires that the borrower pay the full balance of a mortgage when the property is sold.
Federal law prohibits federally-chartered banks from treating property transfers between family members as a sale and thus requiring that the balance of a mortgage be paid. State-chartered banks formerly were not subject to the same rule.
Under a new state law, state-chartered banks may not require the full principal balance of a mortgage be paid for residential property containing less than five dwelling units, including cooperatives and manufactured homes, upon the following transfers:
- On the death of a joint owner with survivorship rights;
- Granting of a lease of three years or less without an option to purchase;
- To a relative resulting from the death of a borrower;
- To the spouse or children of the borrower;
- Resulting from a divorce, legal separation, or an incidental property settlement agreement from one spouse to another; or
- Into a living trust in which the borrower is a beneficiary who retains occupancy rights.