Nonpayment isn't the only way to end up in foreclosure. Transferring the home to a new owner might also lead to a foreclosure.
People who take out a home loan typically sign both a promissory note and mortgage (or deed of trust). These documents contain the terms of your loan. If you breach the agreement, you've defaulted on the deal. Most notably, if you fall behind in payments, you'll be in default.
Homeowners are usually aware that they'll likely lose their home to foreclosure if they don't make their mortgage payments. But not everyone knows that if you default on the deal in some other way, like by transferring the property to a new owner without paying off the loan, you might face foreclosure as well.
What Are the Most Common Types of Mortgage Defaults?
The most frequent types of default—other than nonpayment—are:
- not paying the property taxes (if the loan doesn't have an escrow account)
- not paying the homeowners' insurance (again, if the loan doesn't have an escrow account), or
- transferring ownership of the home to someone else without getting the lender's permission.
Default Due to Selling or Transferring the Property
Most mortgage contracts contain a "due-on-sale" or "due-on-transfer" clause. This clause says you must get the lender's written consent before selling or transferring all or part of the property's ownership. This situation is different from when you sell your home and use the sale money to pay off the mortgage loan. The due-on-sale clause applies when the owner sells or transfers the home to a new owner but doesn't repay the loan.
While due-on-sale clauses were designed to apply when the property is sold to a third party, these clauses apply to any new owner. So, even if the property's new owner is a trust or business that you own, the due-on-sale clause could be triggered.
If you don't get permission before transferring or selling the home, you'll be in default. The lender may accelerate the debt and require you to pay back the entire mortgage loan unless prohibited by law. In a few situations, federal law permits the borrower to transfer the property without the lender's permission.
What Happens If the Lender Accelerates the Debt
It's usually up to the lender to decide whether to enforce a due-on-sale clause. In some cases, the lender might allow you to transfer the title back into your name to avoid acceleration.
If you don't transfer the property back, in cases where you get this opportunity, or if you can't repay the outstanding mortgage loan balance after acceleration, the lender can foreclose your home in the same manner as if you had fallen behind in payments.
Getting Help
If you're considering transferring your property to a new owner and want to find out if a due-on-sale clause is enforceable, consider talking to a real estate attorney. If you're facing a foreclosure because the lender says you violated a due-on-sale clause, consider talking to a foreclosure lawyer to learn about different options.
To get general information about foreclosure procedures in your state, see our Summary of State Foreclosure Laws.
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