What Is a Due-on-Sale Clause?

A due-on-sale clause refers to a mortgage contract provision allowing lenders to require borrowers to repay their loans if all or part of the property securing the loan is sold or transferred to another party. Mortgage lenders typically require borrowers to pay off their outstanding mortgage loan using the proceeds from the sale of the home.

However, some loans—called 澳洲幸运5官方开奖结果体彩网:assumable mortgages—allow the new buyer to take over the existing mortgage. In other situations, like a divorce, the lend♉er might not invoke the due-on-sale clause, allowing the property to change owner♈ship.

How a Due-on-Sale Clause Works

A due-on-sale clause allows a lender to demand full repayment of a loan if the borrower sells the collateral used to secure the loan. With home mortgage loans, a due-on-sale clause prevents a homeowner from selling their home before paying off their debt. If the borrower attempts to sell the property without the mortgage lender's consent, the lender may 澳洲幸运5官方开奖结果体彩网:foreclose upon the property.

Most mortgages issued in the U.S. include due-on-sale clauses. Prior to due-on-sale clauses, most home purchases were funded with assumable mortgages: in the event of a sale, the loan obligations would fall to the new owner. This worked to the disadvantage of the mortgage lender, especially if 澳洲幸运5官方开奖结果体彩网:interest rates had increased since the origination of the loan.

Due-on-Sale Mortgage vs. Assumable Mortgage

With a due-on-sale clause, homeowners cannot transfer the mortgage to the buyer when selling their property as they could with an assumable mortgage. I𝐆nstea🦩d, they must use the sale proceeds to pay off the mortgage, and the buyer must obtain a new mortgage on their own.

In that way, a due-on-sale clause helps protect the lender (or owner of the mortgage) from the risk that the mortgage will transfer to the new owner at a time when prevailing interest rates are higher than the rate on that mortgage. The new buyer would instead have to get a new mortgage at current 澳洲幸运5官方开奖结果体彩网:interest rates.

Lenders, as well as the holders of pools of mortgages such as 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities, 澳洲幸运5官方开奖结果体彩网:asset-backed securities, or 澳洲幸运5官方开奖结果体彩网:collateralized debt obligations generally favor the early retirement of mortgages with lowꦕ int🌺erest rates.

If a seller attempts to circumvent the due-on-sale clause and transfer the property to a new owner without immediately repaying the mortgage, the lender can 澳洲幸运5官方开奖结果体彩网:foreclose on the property and take possession of it.

Due-on-Sale Clause Exceptions

Under the 1982 澳洲幸运5官方开奖结果体彩网:Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations, even when the ownership of the mortgaged property has changed.

If there is a divorce or 澳洲幸运5官方开奖结果体彩网:legal separation, and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause. The same is true if the owner transfers the property to their children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a 澳洲幸运5官方开奖结果体彩网:living trust and the borrower is the 澳洲幸运5官方开奖结果体彩网:trust's beneficiary.

Why Would a Lender Not Inv▨ಌoke a Due-on-Sale Clause?

Even if the lender is legally entitled to invoke a due-on-sale clause, there can be situations in which it may elect not to. For example, in a weak housing market, it might be advantageous for the lender to allow a new buyer to assume the old mortgage rather than risk the possibility that the original borrower will default on it.

Or, if the home has declined significantly in value, and its sale doesn't bring in enough money to cover the debt, the lender might accept less than the full payment in order to recoup at least a portion of what it is owed.

Example of Due-on-Sale Clause

Imagine a hypothetical couple, Alan and Beth, who co-own a home with a $100,000 mortgage🅷. This mortgage has a due-on-sale clause, meaning that if the couple sells their home, they may have to repay the full balance of their mortgage.

After several years, Alan and Beth divorce, and Beth becomes the sole owner of the home. Since they were spouses, the transfer does not trigger the due-on-sale clause: Beth can a💙ssume full ownership of the home, and continue paying the original mortgage.

The next year, housing prices increase, and Beth decides to sell the home to Charlie. Since Charlie is not covered by any exception, Beth must be able to repay the remaining balance on the mortgage upo🦋n closure of the sale. Depending on the housing market at the time of the sale, the lender may or may not choose to enforce the due-on-sale provision.

The Bottom Line

A due-on-sale clause is a provision within a mortgage loan terms requiring a borrower to pay off the loan balance if they sell the home or property. Conversely, some mortgage loans allow the new buyer to take over the existing mortgage—called an assumable mortgage. However,♎ the property can usually change owners in a divorce or inheritance despite a due-on-sale clause. Most mortgage loans in the U.S. have due-on-sale clauses.