What a Due-on-Sale Clause Does
A due-on-sale clause is a provision in a mortgage or deed of trust. It allows the lender to demand full repayment if part of the property or all of it is transferred to a new owner. Without legal restrictions, this clause could be triggered any time residential real property changes hands. That includes 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). This act set the framework for when lenders in the United States can and cannot make a loan due and payable upon transfer.
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. 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 estate loans, including due-on-sale clauses in modern mortgages, the federal Garn-St. Germain Act applies directly. Lenders cannot enforce a due-on-sale clause when property is transferred into a living trust where the borrower remains a beneficiary. They also cannot trigger the clause when a spouse or child inherits the home.
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)The lender's prior written consent is not required for these protected transfers. The loan does not become due and payable simply because ownership of the property changes hands within a family or moves into a trust.
Why Families Should Understand This
Many families worry that transferring a mortgaged home into a trust will trigger the loan becoming due in full. This statute, combined with federal law, confirms that is not the case for qualifying transfers. A parent can transfer residential real property into a revocable living trust without the lender calling the loan.
Understanding these protections is essential for anyone considering a trust-based estate plan that includes real estate with an existing loan. The due-on-sale clause restrictions give families the freedom to plan without fear of an unexpected payoff demand.