Many Newport Beach and Costa Mesa homeowners are sitting on historically low mortgage rates—and don’t realize a federal law may allow them to transfer property, and their low mortgage, to their children without triggering a refinance. The Garn–St. Germain Act of 1982 can protect certain family transfers, but only when done correctly. In this article, we break down what the law allows, where it doesn’t apply, and how local families are using it as part of smart real estate, tax, and estate planning.
If you own real estate in Newport Beach, Costa Mesa, or coastal Orange County, there’s a clause buried deep inside your mortgage that can quietly derail even the best-laid plans to gift your home and it’s low mortgage to your children.
It’s called the due-on-sale clause. Sometimes also called an acceleration clause.
And if you’re thinking about gifting, transferring property to family, placing a home into a trust, or restructuring ownership for tax or estate planning purposes, and don’t want that to impact your mortgage, this one clause—and a federal law from 1982—can make all the difference.
That law is the Garn–St. Germain Depository Institutions Act of 1982.
Done right, it protects families, preserves low interest rates, and prevents lenders from forcing unnecessary refinances.
Done wrong, it can trigger a loan payoff at the worst possible time.
Let’s break it down.
What Is a Due-On-Sale Clause (And Why It Matters More Today)
Most mortgages include a due-on-sale clause. It gives the lender the right to call the loan due if the property is transferred.
Why? Simple.
Banks don’t like surprises or you unilaterally changing the terms of the loan, i.e. who owns the property.
If interest rates rise, a lender would much rather get paid off and re-lend at today’s higher rates than keep an old, low-rate loan alive.
That matters a lot in coastal Orange County, where:
- Many owners hold older, ultra-low-rate mortgages
- Homes often stay in families for decades
- Trusts, LLCs, and family transfers are common
This is exactly why Congress stepped in.
The Garn–St. Germain Act: The Federal Safety Net
The Garn–St. Germain Act (12 U.S.C. § 1701j-3) is federal law. It overrides state law and mortgage contract language.
It allows lenders to enforce due-on-sale clauses except in specific family and estate-planning situations.
These exceptions are not optional. They’re mandatory.
For Newport Beach and Costa Mesa homeowners, several of these exemptions are especially important.
The Big One: Parent-to-Child Transfers (Even While Alive)
Here’s the headline most families care about:
A lender may NOT enforce a due-on-sale clause when a parent transfers property to their child. This applies at death and while alive.
That protection comes directly from 12 U.S.C. § 1701j-3(d)(6):
“A transfer where the spouse or children of the borrower become an owner of the property.”
What this means in real life
✔ The parent does not need to be deceased
✔ The transfer can be partial or 100%
✔ The property does not need to be owner-occupied
✔ It can be a rental or investment property
✔ The lender cannot call the loan due solely because of the transfer
This is huge for families holding Newport Beach or Costa Mesa real estate with favorable loan terms.
Important Clarification: Ownership ≠ Loan Assignment
Here’s where many people get tripped up.
The Garn–St. Germain Act:
- Prevents loan acceleration
- Preserves existing loan terms
But it does not require the lender to:
- Assign the loan to the child
- Release the parent from liability
- Approve a formal loan assumption
The loan usually stays in the parent’s name. Ownership changes. Borrower status does not—unless the lender voluntarily agrees.
We have many clients that seek to have the lender change over the loan to the children’s names, via an assignment (whereby the child assumes the loan). Some banks will allow this (likely knowing the law cannot prevent the transfer anyways and/or as a customer service), whereas some banks will deny the request (likely hoping that leads to a more favorable refinance or loan payoff).
This distinction matters when planning long-term liability, indemnification, and refinancing strategies.
Trust Transfers: Powerful—but Must Be Done Correctly
Trusts are everywhere in Newport Beach and Costa Mesa.
When done properly, they’re one of the safest ways to:
- Avoid probate
- Preserve privacy
- Streamline family transfers
Revocable Living Trusts
The Garn–St. Germain Act explicitly protects transfers into a revocable living trust, as long as:
- The borrower remains a beneficiary
- Occupancy rights are not transferred
For primary residences, this is usually a clean, protected move.
Irrevocable Trusts
More complicated.
Some irrevocable trusts may still qualify—but lenders are far less comfortable here. These transfers require careful structuring and legal review, especially when mortgages are involved.
What the Garn–St. Germain Act Does Not Protect
This is where costly mistakes happen.
LLC Transfers
Transferring property into an LLC—even a single-member LLC—is not protected by Garn–St. Germain.
Some Fannie Mae and Freddie Mac loans allow it under specific guidelines.
Many do not.
This is especially relevant for:
- Newport Beach rental properties
- Costa Mesa investment homes
- High-value coastal assets held for privacy or liability protection
LLC transfers should never be done casually when a mortgage is in place.
Like with the assumption to children, many banks and lenders will allow a transfer into an LLC; many will not. Consult with your lender to find out their policies and requirements to obtain approval.
Note – Transferring real property into an LLC can also cause a property tax reassessment unless done correctly (i.e. ensuring the same exact ownership remains before and after the LLC transfer – i.e. Bob and Sue owned the home in their own names, then transfer to an LLC owned wholly by Bob and Sue). Consulting with a real estate legal professional such as Lucas Real Estate is highly advised.
Important Limitation: This Strategy Does Not Work in Reverse
Here’s a critical detail many homeowners get wrong.
The Garn–St. Germain Act only works one way.
It protects parents transferring property to children.
It does not protect children transferring property to parents.
This distinction matters.
Under federal law, the protection applies only when the spouse or children of the borrower become an owner of the property. That language is intentional. Congress chose to protect downward family transfers—parents passing homes to the next generation—not the other way around.
So if a child owns a home with a mortgage and later deeds that property to a parent, the lender may enforce the due-on-sale clause. In that scenario, the bank can legally call the loan due, require a refinance, or demand payoff.
There is no automatic federal protection.
This is where we see well-intentioned families accidentally trigger major problems. A simple deed transfer, done without advice, can force an unnecessary refinance and wipe out a historically low interest rate.
The takeaway is simple:
The Garn–St. Germain Act protects parent-to-child transfers—but not child-to-parent transfers.
If you’re considering any “reverse” family transfer, it’s essential to explore alternative structures—such as trusts, lender-approved assumptions, or strategic refinancing—before title is changed.
This is exactly where experienced legal and real estate guidance makes all the difference.
Rental Properties: Still Protected for Parent-to-Child Transfers
Another common myth:
“The home must be the parent’s primary residence.”
Not true.
For parent-to-child transfers, use does not matter.
The property can be:
- A long-term rental
- A second home
- A former residence
As long as it’s residential real property with fewer than five units, the exemption applies.
Why This Matters So Much in Newport Beach & Costa Mesa
Our market is different.
Homes are valuable.
Tax consequences are real.
Mistakes are expensive.
We routinely see families accidentally:
- Trigger unnecessary refinances
- Lose low interest rates
- Forfeit step-up in basis
- Create Proposition 19 property tax exposure
All because the legal and real estate sides weren’t aligned.
This Is Where Lucas Real Estate Group Is Different
At Lucas Real Estate Group, in partnership with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program, we don’t just sell homes.
We help clients buy, sell, hold, and transfer real estate with legal and tax strategy baked in.
Led by Devin R. Lucas — REALTOR®, Real Estate Broker, and Real Estate Attorney — our team understands:
- Market timing
- Family transfers
- Trust and estate sales
- LLC structuring
- Capital gains and property tax planning
This integrated approach is why trustees, high-net-worth families, and long-time Newport Beach and Costa Mesa property owners trust us.
Bottom Line
The Garn–St. Germain Act is one of the most powerful—and misunderstood—real estate laws affecting coastal Orange County homeowners.
Used correctly, it preserves wealth.
Used incorrectly, it creates unnecessary risk.
If you’re thinking about selling, transferring, or restructuring ownership of a Newport Beach or Costa Mesa property, this is a conversation worth having before documents get recorded.
Questions or Need Help?
Thinking of selling, gifting or transferring California real estate? We’d love the opportunity to assist.
We provide full-service sales and property management in Newport Beach, Costa Mesa, and surrounding Orange County coastal communities. We provide real estate legal services in all counties throughout California.
Call: 949-478-1623
Email: info@lucas-real-estate.com
For matters involving family transfers, trusts, private sales, or tax-driven strategies, please schedule a paid one-hour consultation (Zoom, phone, or in-person):
Book a consultation here
— Devin R. Lucas
About the Author
Devin R. Lucas is a Real Estate Broker, REALTOR®, and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities.
Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight along with real estate services.
Together, they lead Lucas Real Estate, operating in partnership with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program.
We offer unmatched expertise in California real estate sales, property management, tax matters, and property tax rules—including Propositions 13, 58, 193, 60, 90, and Proposition 19.
If you’re selling a property, exploring a traditional listing, seeking a buyer’s agent, or evaluating property management services, we’re here to help—free of charge.
For matters requiring real estate legal analysis—private family sales, Prop 19 questions, gifting strategies, LLC structuring, capital gains planning—schedule a paid one-hour consultation via Zoom or phone: Book a consultation here
Lucas Real Estate is a full-service brokerage offering residential representation, legal services, and strategic tax planning—all under one roof.
Sources
- 12 U.S.C. § 1701j-3 (Garn–St. Germain Depository Institutions Act of 1982)
- 12 C.F.R. § 191
- Fannie Mae Servicing Guide D1-4.1-02
- Freddie Mac Servicer Guide § 8406.4
Lucas Real Estate is a full-service brokerage offering residential real estate, legal services, and strategic tax planning—all under one roof.
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