When a property encumbered by a mortgage is transferred, most mortgages have a due-on-sale provision that requires you to pay off the entire loan. This means that even if have the desire and ability to take over the mortgage payments, the bank can prevent you from doing that. So you have to either a) let the home go, or b) find someone to refinance it for you. For some people, refinancing isn’t a problem. But for a lot of folks, it is, especially if a rough economy has harmed your credit rating. And even if you do qualify for a refi, you’ll still be required to spend thousands of dollars to do so.
Fortunately, if the transfer is to a relative due to a divorce or death, the law provides an escape from the due-on-sale clause: the Garn-St. Germain Act.
Garn was passed in 1982 to help the banks make more money. See, back then, interest rates were high and getting higher. A lot of people who bought houses wanted to keep the existing mortgage on the property because a new mortgage would have a higher APR. And a lot of people who sold houses that had low-interest loans wanted to be able to sell the low-interest rate along with the property – because it improved the marketability of the properties. But the banks were obviously unhappy about all of these borrowers who weren’t being forced to refinance new loans, so they started inserting due-on-sale clauses into their contracts. But then a few state courts around the country saw what was happening and said, “No, that’s not fair, you made a 20 year loan with an 8% APR, you’re stuck with a 20 year loan with an 8% APR.”
This made the banks even more unhappy, so they had to pull out their trump card: Congress. After taking a lot of steak dinners and campaign contributions, they passed the Garn-St. Germain Depository Institutions Act of 1982. It prohibited states from stopping due-on-sale clauses. Suddenly, thousands of home buyers were forced to go to banks for new loans every time a home purchase happened.
Thankfully, a few guys in the Hill were concerned enough about ordinary people to insert some exceptions to the new rule: if someone receives a property due to death, divorce, or other family-style transfer, then they don’t have to deal with a due-on-sale provision.
So if you want to assume a mortgage on a property you’re receiving through devise or divorce, you need to write the mortgage company a letter explaining what you’re trying to do. Send it to their correspondence address that they put on the latest statement. You can see a sample letter here: