A due-on-sale clause is a rule in your mortgage or deed of trust. It lets the lender demand the full balance if the property is sold or moved to a new owner. Most home loans include one. But federal law creates key exceptions that protect common estate planning transfers.
How a Due-on-Sale Clause Works
When you sign a mortgage, the loan papers usually include a due-on-sale clause. If you transfer the property, the lender can "call" the loan. That means they can make you pay the full balance right away. The lender can also choose not to enforce it. But the clause gives them the option.
This applies to any sale or transfer. It includes gifting the home to a family member, moving it to an LLC, or adding someone to the title. Even small changes in who holds the deed can trigger the clause if the lender decides to act on it.
Federal Exceptions Under the Garn-St Germain Act
The Garn-St Germain Act of 1982 is a federal law. It limits when lenders can enforce a due-on-sale clause. Under this law, a lender cannot call the loan when the transfer is:
- To a spouse or children of the borrower
- To a relative after the borrower's death
- Into a living trust where the borrower stays a beneficiary (a person who benefits from the trust)
- As part of a divorce or separation deal
- Into a joint tenancy with a spouse
These exceptions mean most estate planning transfers are safe. Moving your home into a living trust does not trigger the clause. The mortgage stays in place. You keep making the same payments. Nothing changes from the lender's point of view.
When Lenders Can Enforce the Clause
Lenders can enforce the clause when the transfer does not fit a protected exception. Common cases where they can enforce it include:
- Selling the home to someone outside the family
- Moving the property to a business entity (like an LLC) for investment use
- Loans taken over by a new owner the lender did not approve
If the lender enforces the clause, the borrower must pay the full balance or get a new loan. This can be a costly shock if the transfer was not planned well. It is one of the most common surprises people face during real estate transfers.
Protecting Your Transfer
Before you transfer real estate in Arizona, read your loan papers closely. Make sure your transfer fits a federal exception. If you are moving property into a trust as part of your estate plan, the Garn-St Germain Act almost always protects you. But if you are moving it to an entity or a non-family member, talk with the attorneys we work with first.
It also helps to notify your lender in writing before the transfer. While you are not always required to, doing so creates a clear record. This avoids confusion or a surprise demand letter down the road.
For more on how property transfers fit into estate planning, read our guide on trusts vs. wills. Knowing the rules ahead of time avoids costly surprises. Simple as that.