Luckily, the Garn-St. Germain Act provides exceptions to the clause. Its list of exceptions is as follows:
- Creating a lein or other encumbrance not relating to a transfer of rights of occupancy
- Creating a purchase money security interest for household appliances
- Transfer on death of joint tenant or tenant with right of survivorship
- Granting a leasehold interest of three years or less without an option to purchase
- Transfer to a relative resulting from the death of the borrower
- Transfer where the spouse or children become an owner
- Transfer resulting from a dissolution of marriage, legal separation, or incidental property settlement agreement, by which the spouse of the borrower becomes an owner
- Transfer into an inter vivos trust (living revocable trust) in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy
- Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.¹
So the transfer of property due to common estate changes such as death or divorce or even through getting money out for remodeling or to put in a short-term lease will not trigger the due-on-sale clause. Neither will putting it into a living revocable trust, as long as that trust remains fully revocable.
Note that land trust schemes run afoul of this law. There is no exception for the transfer of a mortgage into an LLC. Hundreds of thousands of properties have been put into land trusts where an LLC is the beneficiary. According to exception 8 above, to avoid the due-on-sale clause, the trust must remain revocable. If and when the land trust owner sells any shares of the land trust to others, the due on sale clause is triggered and the lender has the right to call the loan.
There is no statute of limitation for enforcement of a due-on-sale clause after the transfer of a mortgaged property into an LLC, so a bank can wait until interest rates have gone up several years down the road and then enforce the clause. Most transfers of your personal residence are covered in the exceptions, and you lose a lot of tax benefits as well as homestead exemption protection if your personal residence is transferred into an LLC, so don’t put your home into an LLC regardless. Putting it into your living revocable trust to avoid probate and get around the due-on-sale clause, though, is a very good idea.