Do I have to refinance if I inherit real estate?

When a person inherits the home of a loved one, or a spouse obtains a property through divorce they often are told or believe that they must pay off the current lien holder…that they are obligated to refinance the loan into their name if they want to keep the property. But a lender cannot make an individual pay off the mortgage loan on a property they have inherited from a relative or force a person to pay off a mortgage loan on a residential property that was acquired through divorce or a legal separation agreement.

Today most residential mortgage loans include a “due-on-sale” clause. This clause in a mortgage contract may require the borrower to pay the loan off if a beneficial interest in the property is transferred to another person. But there are certain instances in which this contract provision cannot be enforced. The law that limits when a lender can enforce a due-on-sale clause is 12 U.S.C. 1701j-3 – Preemption of Due-On-Sale Prohibitions.

Here is a list of the reasons in § 1701j–3(d) that limits a lender’s right to enforce a due-on-sale clause in a mortgage loan on residential real property containing less than five units:

  1. the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
  2. the creation of a purchase money security interest for household appliances;
  3. a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  4. the granting of a leasehold interest of three years or less not containing an option to purchase;
  5. a transfer to a relative resulting from the death of a borrower;
  6. a transfer where the spouse or children of the borrower become an owner of the property;
  7. 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;
  8. 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; or
  9. any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

Of course there may be many reasons someone who inherits or is awarded a home in a divorce proceeding may want or need to refinance. For example, they may be able to obtain a lower rate or payment; there may be a provision in a will or divorce decree requiring the loan to be paid off or refinanced; someone might want to tap some of the equity in the property. But a lender can’t necessarily force a person to pay off a loan when they acquire a property under the circumstances listed above.

Note that the foregoing is for informational purposes only and is not to be construed as legal advice. Please consult with a competent real estate attorney if you have questions about your specific rights and obligations on property you inherit or acquire through a divorce.