Mortgage · 12 U.S.C. §1701j-3(d)Due-on-sale clause exceptions: when the lender cannot call the loan
Most mortgages say the whole balance is due if the home is transferred. Federal law blocks that clause for a home of fewer than five units in nine situations (12 U.S.C. §1701j-3(d)), including: a transfer on the death of a joint tenant or tenant by the entirety; a transfer to a relative resulting from the borrower's death; a transfer where the borrower's spouse or children become owners; a transfer by a divorce decree, legal separation agreement or property settlement that makes the spouse an owner; and a transfer into a living (inter vivos) trust in which the borrower is and remains a beneficiary, if it does not transfer the right to occupy. A second lien that does not transfer occupancy and a lease of three years or less without a purchase option are also exempt. A sale to an unrelated buyer is not on the list – the loan is normally paid off at closing.
Transfers the lender cannot treat as a sale (§1701j-3(d))
Death of a joint tenant
Transfer by devise, descent or operation of law on the death of a joint tenant or tenant by the entirety (d)(3).
Relative after death
A transfer to a relative resulting from the death of a borrower (d)(5).
Spouse or children
A transfer where the borrower's spouse or children become an owner (d)(6).
Divorce
A decree, legal separation agreement or property settlement by which the spouse becomes an owner (d)(7).
Living trust
Into an inter vivos trust in which the borrower is and remains a beneficiary, not transferring occupancy (d)(8).
Short lease, second lien
A lease of 3 years or less with no purchase option (d)(4); a subordinate lien that does not transfer occupancy (d)(1).
What the exceptions do not cover
- A sale to an unrelated buyer – the payoff happens at closing unless the lender approves an assumption.
- Homes of five or more units and commercial property.
- A 'subject-to' sale where the seller's loan stays in place – the lender keeps its option to call it.
What the TC and title company check
- Whether the deed into a trust, to a spouse or from an estate fits one of the exemptions.
- Who the servicer has confirmed as the successor in interest, before asking for a payoff.
- In a sale, the payoff statement – the exemptions do not let a buyer take over the loan.
Questions owners and heirs ask
Can the bank call my mortgage if I put my house in a living trust?
Not if you are and remain a beneficiary of the trust and the transfer does not give the right to live there to someone else (12 U.S.C. §1701j-3(d)(8)).
Can I keep my parent's mortgage after they die?
A transfer to a relative resulting from the borrower's death is exempt from the due-on-sale clause (§1701j-3(d)(5)), so the lender cannot call the loan just because of that transfer.
Does the due-on-sale exception apply in a divorce?
Yes, for a transfer by decree, legal separation agreement or property settlement that makes the borrower's spouse an owner (§1701j-3(d)(7)).
Related guides
Keep the deed, trust or decree and the servicer's letters on the deal in ClosingCode, with tasks for the payoff or assumption steps and their due dates.
Start free trialSource: 12 U.S.C. §1701j-3(d) (Garn-St Germain Depository Institutions Act, govinfo.gov, read October 25, 2026).
General information, not legal advice. ClosingCode is software; it is not a law firm, lender or brokerage. This guide is not a substitute for the advice or services of an attorney.