DEAR BENNY: My wife and I are in the process of getting a divorce. I am prepared to give her the family home so that our children will not be disrupted any more than they already are. I know that our mortgage lender will not relieve me of our joint obligation to make the monthly payments, but hopefully that will not be a financial problem for us. We have been advised that a lender can use the "due on sale" clause in the mortgage documents to block this transaction. Can this happen? –Tom
DEAR TOM: The short answer is no. Federal law permits certain real estate transfers even though the loan documents contain the "due on sale" clause.
Let’s look at this concept. Mortgage lenders are in the business of making money, and obviously they do not like to allow people to assume a low interest rate when rates are much higher. While this scenario sounds unlikely in today’s marketplace, many readers will recall the excessively high mortgage interest rates during the past decade.
Thus, many years ago, the mortgage industry came up with the concept of "due on sale." Most mortgage loan documents contain language to the effect that if property that is secured by a mortgage is sold or transferred without the lender’s prior written consent, the lender has the right to call the entire mortgage due, and insist on payment in full. This is known as the "due on sale" clause.
There has been much litigation over this concept throughout the country, and the great majority of the court cases have upheld the lender’s right to enforce the due-on-sale concept. In 1982, however, Congress enacted the Garn-St. Germain Act (12 UCA 1701j-3), which imposed certain restrictions on the enforcement of this clause.
This law contained nine specific exemptions where a lender was not permitted to exercise its option pursuant to a due-on-sale clause. When there is a real property loan secured by a lien on residential real property containing fewer than five dwelling units — including a lien on the stock of a cooperative housing corporation or a residential manufactured home — a lender cannot enforce the due-on-sale clause under the following circumstances:
- a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
- a transfer where the spouse or children of the borrower become an owner of the property;
- a transfer to a relative resulting from the death of a borrower;
- a transfer by operation of law on the death of a joint tenant or tenant by the entirety;
- a transfer into an "inter vivos" trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property (i.e., the so-called "living trust");
- the creation of a purchase-money security interest for household appliances (i.e., where you pledge your house in order to replace your heating and air conditioning system);
- the granting of a leasehold interest of three years or less not containing an option to purchase;
- a subordinate lien that does not involve a transfer of rights of occupancy in the property, and
- any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board. …CONTINUED
I highlighted your situation by listing it first on the list. Clearly, if you and your spouse enter into a formal, legal separation agreement, or actually have a court order granting a divorce — which contains language reflecting the house transfer — you are protected under the law and the lender cannot exercise the due-on-sale clause, which I suspect is contained in your mortgage documents,
However, here are some suggestions before you proceed to transfer the property to your wife:
First, before the divorce is finalized, arrange to transfer the house. Normally, when real property is sold or transferred, there is a transfer and recordation tax that has to be paid to the local jurisdiction.
For example, in the District of Columbia, where I practice law, if the property is appraised at more than $400,000, the local government will want to collect 2.9 percent of the appraised price. Normally, if you sell to a third party, each side will split these costs, paying 1.45 percent. (If the property is worth less than $400,000, the taxes are lowered to 1.1 percent each).
However, if you are married and transfer the property to your spouse, you do not have to pay either of these taxes. You pay only a nominal fee to record the deed — usually less than $30.
So discuss this with your attorney and arrange to transfer the property before the divorce decree becomes final.
Second, what is your current mortgage interest rate? Rates are quite low today, so you might want to consider refinancing first, so as to take advantage of that lower rate. After that, you can have the property transferred to your wife. You will, of course, have to explain your pending divorce situation to the lender, but if you can qualify, there could be substantial monthly savings.
Finally, I strongly recommend that you advise your lender of your plans. Legally, it has no legal right to contest your decision, but it always makes sense to keep lenders informed before you take any steps to change the ownership.
DEAR BENNY: My family and I have lived in our current home for seven years. Do we qualify for the $6,500 tax credit for existing homeowners if we purchase a replacement principal residence? If so, please tell me where to find in the Internal Revenue Service regulations to file for it. –Don
DEAR DON: Last year, Congress expanded the tax credits available to homebuyers. The new law allows existing homeowners to buy a new house — not to exceed $800,000 — and so long as they owned and lived in their current home for at least five consecutive years out of eight years prior to the purchase date of the new home. …CONTINUED
If you qualify, you can claim a tax credit equal to 10 percent of the home’s purchase price, up to a maximum of $6,500. However, there are income limitations. If you are a single taxpayer, you cannot claim the credit if your income is over $125,000; the limit for joint taxpayers is $225,000.
One interesting fact of the new law is that you do not have to sell your existing home; if you can afford to keep it as a rental, this does not disqualify you from the tax credit. Also, the home does not have to cost more than that value of your present residence.
A tax credit is not the same as a tax deduction. The latter allows you only to reduce the amount of the tax owed by the percent of your tax bracket. A tax credit is a full dollar-for-dollar deduction of what you would otherwise owe the IRS.
For more information, go to federalhousingtaxcredit.com (sponsored by the National Association of Home Builders) or to the IRS Web site and locate Form 5405.
DEAR BENNY: Our home equity lender has instituted a new flood insurance requirement. They now require homeowners to carry coverage equal to either 80 percent of their hazard insurance coverage amount or the unpaid principal balance of all liens on the property, whichever is greater. If this amount is more than the maximum $250,000 of coverage available through the National Flood Insurance Program, the lender requires we carry the maximum $250,000.
My question: In our case, even the $250,000 coverage amount is much more than the unpaid liens on the property, which total about $155,000. Can the lender legally require a coverage amount greater than the total amount of unpaid liens? –Therese
DEAR THERESE: This is a common problem that homeowners face, not only with their home equity loan but with their primary (first) mortgage as well. I firmly believe that a lender can insist on insurance coverage only up to the amount of the moneys owed to them.
However, that’s my opinion; not everyone agrees with me, especially mortgage lenders.
The answer to your question depends on the state law where your property is located. It is my understanding that many states have enacted legislation specifically prohibiting a lender from requiring insurance that exceeds the amount of the mortgage loan.
Talk with a local attorney about your situation. If there is no law, complain to your lender and send a copy of your complaint to your state attorney general. If enough people complain, the lenders may cave.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
***
What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
