What a Due-on-Sale Clause Does
A due-on-sale clause is a provision in a mortgage or deed of trust that allows the lender to demand full repayment of the loan if the property is transferred to a new owner. Without legal restrictions, this clause could be triggered any time property changes hands, including transfers into a living trust, transfers between spouses, or transfers to heirs after death.
Arizona adopted specific regulations tied to the federal Thrift Institutions Restructuring Act (P.L. 97-320), which set the framework for when lenders can and cannot enforce these clauses.
Transitional Rules for Older Loans
For residential loans (secured by one-to-four-unit properties on 2.5 acres or less) that were made or assumed between July 8, 1971, and October 15, 1982, Arizona imposed transitional protections. Until October 14, 1987, lenders could not increase the interest rate by more than half a percent upon a transfer, and all other limitations under A.R.S. 33-806.01 applied.
Prior to October 15, 1987, upon a transfer of interest in such property, the interest rate on such loans shall not be increased by more than one-half of one per cent, and all other limitations provided in section 33-806.01 shall apply.
A.R.S. § 33-1571(1)After October 14, 1987, the federal rules under P.L. 97-320, section 341(b) took full effect for these older loans as well.
How This Connects to Estate Planning
For all other real property loans, the federal Garn-St. Germain Act applies directly. That means lenders cannot enforce a due-on-sale clause when property is transferred into a living trust where the borrower remains a beneficiary, when a spouse or child inherits the home, or in several other common estate planning scenarios. This protection is why transferring a mortgaged home into a trust does not trigger the loan becoming due in full.
P.L. 97-320, section 341, applies in accordance with its terms to all real property loans other than those described in paragraph 1 of this section.
A.R.S. § 33-1571(2)Understanding these protections is essential for anyone considering a trust-based estate plan that includes real property with an existing loan.
