Question: I bought my single family home three years ago in my own name. Now I am married with a young family. I want to add my wife's name to the deed, but the local title company I contacted has recommended I get permission from the mortgage company to do this. According to the title company, adding her name without notice could cause my mortgage lender to cancel the mortgage. I then contacted my lender, who is insisting my wife be added to the mortgage -- and they will only charge $300 to accomplish this process. Does this sound right? Can I add my wife to the title without adding her to the mortgage? For that matter, do I need to add her name at all since if I die my wife automatically will inherit the house under my Will. How does inheritance of a house affect a mortgage anyway?
Answer: You have asked a lot of important questions, but this column is too short to give you a comprehensive response. However, here is my response to most of your concerns.
Your title company -- and the mortgage lender -- apparently are not aware of a law enacted by Congress in 1982, which deals directly with the issue of the due on sale clause.
A "due on sale" clause can be found in most mortgage documents. Oversimplified, it states that if the house is sold -- or otherwise transferred -- the lender reserves the right to call the entire loan balance due. In other words, the loan will not automatically be assumable. This clause was developed by lenders when rates were rising. Let's take this example: Mr. and Mrs. A purchased their house in l975 for $30,000, and obtained a mortgage loan of $25,000 at an interest rate of 6.5%. In l980, they sold the house to Mr. and Mrs. B for $75,000. Interest rates at that time were much higher -- in the range of 9.5%. In the absence of a due on sale clause (a non-assumable provision), Mr. and Mrs. B could have purchased the house and continued to pay the lender at the original rate of 6.5%.
Thus, lenders -- to protect their investment -- developed the concept of the due on sale. However, in l982, Congress address these issues, and specifically stated that "a lender may not exercise its option pursuant to a due on sale clause upon... (6) a transfer where the spouse or children of the borrower become an owner of the property."
There are other exemptions, but clause 6 is relevant to your situation.
Thus, it is very clear you have the right to add your wife to the title, without having the lender call the mortgage due. Furthermore, the lender does not need to have your wife added to the mortgage documents. You signed a mortgage (deed of trust) with your lender and it was recorded upon the land records. When you transfer the property to both of your names, that recorded document will be after the deed of trust. The law looks to priorities of recording; the first recorded document takes priority over the second recorded document. Thus, if you should fail to make your mortgage payments, and the lender would foreclose on the property, your wife's title interest would be subordinate to the recorded first deed of trust, and her interests could be eliminated by the foreclosure sale.
It would appear that the lender is completely protected, and does not have to charge you anything more for this protection.
Your second question raises the issue of inheritance. If the house is in your name only, upon your death there are several options.
- If you have a Will, the house will go to the person named in your Will. However, your estate will have to be probated, which can be time-consuming and expensive.
- If you have no Will, the house will be distributed in accordance with the laws of intestacy in the jurisdiction where you live. Depending on the state, your wife may get between one-third or one-half of your estate -- including the house.
If, on the other hand, your wife is on title with you as either tenants by the entireties (reserved exclusively for husband and wife) or joint tenants, she will automatically inherit the entire house. No probate will be required.
Your final question is also answered by the l982 law. Clause 3 states that the lender cannot exercise its option under the due on sale clause where title is transferred "by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety."
This is a general overview of an answer to your important questions. I have two recommendations for you.
First, discuss your personal situation with your own lawyers and tax advisors.
Second, consider transferring the house into your joint names as soon as possible. If, for example, you are sued and the plaintiff is awarded a large judgment against you, your house can be sold to satisfy that judgment if it is only in your name. If the house is held as tenants by the entirety between you and your wife, unless the judgment is against both of you, the house cannot be touched by a creditor of only one party to the marriage.