The due-on-sale clause in a subject-to deal

What the clause is

Nearly every residential mortgage contains a provision letting the lender demand the full balance if the property is sold or transferred without consent. A subject-to purchase transfers the property while leaving the loan in place, which is exactly the event the clause is written to catch.

The exception people cite

The Garn-St Germain Depository Institutions Act preempted most state restrictions on due-on-sale enforcement, and in exchange carved out nine transfers a lender may not call. The one relevant here is § 1701j-3(d)(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.

Why it does not cover a subject-to purchase

Two independent failures. The assignment of beneficial interest removes the seller as beneficiary, so the borrower does not remain one. And the buyer takes possession, so the transfer plainly relates to a transfer of occupancy rights. Failing either condition is enough. A subject-to deal fails both.

What that means in practice

The lender's right to call the loan survives the trust. Whether a given lender exercises it is a separate, commercial question — but it is a risk both parties are taking on knowingly, or they should not be taking it on at all. FAPG treats this as a blocking disclosure acknowledged by both sides before any money is captured, and the flag cannot be waived by staff.