What is a Due-on-Sale Clause?
What is a Due-on-Sale Clause?
A due-on-sale clause (sometimes called an alienation clause) is a provision commonly found in mortgage or deed of trust contracts. It grants the lender the right to demand full repayment of the outstanding loan balance when the property is sold or transferred to another party—either through an outright sale, transfer of title, or sometimes even certain lease arrangements.
Here are some key points:
- Triggering Event:
- Typically, the clause is triggered when the borrower sells or transfers ownership of the property without the lender’s consent.
- The lender can then require the loan to be paid in full immediately (the entire remaining principal plus any accrued interest).
- Rationale:
- Lenders include a due-on-sale clause to protect their investment.
- The clause allows them to reassess the risk of the loan. If a property is transferred to a less creditworthy individual without lender approval, it can pose a higher default risk.
- Impact on Mortgage Assumptions:
- Loans with a due-on-sale clause are not easily assumable, because the new borrower would trigger the clause and thus force payoff or renegotiation.
- Some government-backed loans (e.g., certain FHA or VA loans) have different rules regarding assumptions, but most conventional mortgages do contain a due-on-sale clause.
- Exceptions & Permissions:
- There can be some exceptions, such as transfers to a living trust where the original borrower remains a beneficiary and occupant, or transfers upon death to a close relative.
- In some cases, lenders will permit transfers, but generally, they must provide written consent or a release.
- Practical Implications:
- If you plan to sell your property or transfer it to someone else (e.g., a family member) while still owing on the mortgage, you typically need to notify your lender and get approval. Otherwise, the lender may accelerate the loan.
- Attempting to transfer a mortgaged property without the lender’s knowledge or permission can lead to foreclosure if the due-on-sale clause is enforced and repayment isn’t made.
The due-on-sale clause protects the lender’s interests by ensuring they can immediately demand payoff and issue a new loan (under current market terms) rather than stay locked into an existing loan when a property changes hands.
