Due-On-Sale Clause

Definition

A Due-On-Sale Clause is a provision within a mortgage or deed of trust that requires the borrower to repay the entire loan balance if the property is sold or transferred. This clause ensures that the lender can either get paid in full or approve a new borrower, maintaining the integrity and security of the loan terms.

Purpose

The due-on-sale clause is primarily designed to protect the lender from any changes in risk associated with the new property owner. When invoked, this clause prevents the new owner from simply assuming the existing mortgage terms without the lender’s approval.

Examples

Home Sale: When a homeowner sells their property, the existing mortgage must be repaid in full at the closing of the sale unless the lender allows the new buyer to assume the mortgage.
Transfer to Family Member: If a property is transferred to a family member, such as through inheritance, the due-on-sale clause could be triggered. The lender may require full repayment or review the new owner’s creditworthiness.
Investment Property Sale: Selling an investment property with an outstanding mortgage can trigger a due-on-sale clause, necessitating the settlement of the existing loan before the new owner can take title.

Frequently Asked Questions

What happens if a due-on-sale clause is triggered?

If a due-on-sale clause is triggered, the lender can demand the full loan balance be repaid immediately. If the borrower cannot meet this demand, the lender may proceed with foreclosure actions.

Can a lender waive the due-on-sale clause?

Yes, a lender can waive the due-on-sale clause. This often occurs if the interest rate is adjusted, or the new owner qualifies under the existing terms, known as an assumption of mortgage.

Are there exceptions to the enforceability of a due-on-sale clause?

State-chartered lenders in some jurisdictions may have limits on enforcing due-on-sale clauses. Additionally, certain transfers, such as those to immediate family members or due to inheritance, might be exempt from triggering this clause under federal law.

Does a due-on-sale clause apply to refinancing the mortgage?

No, a due-on-sale clause typically applies only to the sale or transfer of the property and not to refinancing, where the terms of the mortgage are modified between the borrower and the same lender.

Mortgage: A loan secured by the collateral of specified real estate property, obligating the borrower to make a predetermined series of payments.
Interest Rate: The percentage of a loan amount charged by the lender to the borrower for the use of the loan.
Assumption of Mortgage: An agreement in which a new buyer assumes the mortgage obligations of the seller according to the original terms of the loan, subject to the lender’s approval.
Foreclosure: The legal process by which a lender takes control of a property securing a loan, often as a result of the borrower’s failure to make loan payments.

Online Resources

Investopedia on Due-On-Sale Clause: Investopedia
Consumer Financial Protection Bureau: CFPB
Nolo’s Legal Encyclopedia: Nolo

Suggested Books for Further Studies

“Real Estate Principles” by Charles F. Floyd and Marcus T. Allen
“Essentials of Real Estate Finance” by David Sirota and David C. Jenrette
“The Mortgage Professional’s Handbook” by Jess L. Lederman

Fundamentals of Due-On-Sale Clause: Real Estate Basics Quiz

### What is the primary purpose of a due-on-sale clause in a mortgage? - [ ] To lower the monthly payments - [x] To require loan repayment upon sale or transfer of property - [ ] To reduce the interest rate - [ ] To protect the borrower in case of foreclosure > **Explanation:** The due-on-sale clause ensures the lender gets repaid in full or approves a new borrower by requiring loan repayment if the property is sold or transferred. ### When is a due-on-sale clause typically triggered? - [ ] During property maintenance - [ ] When property taxes are due - [x] Upon the sale or transfer of the property - [ ] When there's a change in interest rates > **Explanation:** The due-on-sale clause is triggered when the property is sold or transferred, not during maintenance or tax payment periods. ### Can state-chartered lenders always enforce a due-on-sale clause? - [ ] Yes, in all scenarios - [x] No, some have restrictions - [ ] Yes, unless waived by the borrower - [ ] No, only federal lenders can > **Explanation:** State-chartered lenders might have restrictions on enforcing due-on-sale clauses, depending on jurisdiction-specific regulations. ### Under which condition might a due-on-sale clause not be enforceable? - [x] Transfer to an immediate family member - [ ] Sale to a third party - [ ] Change in property use - [ ] Refinancing with the same lender > **Explanation:** Federal law might exempt transfers to immediate family members or due to inheritance from triggering a due-on-sale clause. ### What must occur if a due-on-sale clause is not waived by the lender? - [ ] The interest rate must be lowered - [ ] The borrower must refinance the loan - [ ] The property must be appraised - [x] The loan must be repaid in full > **Explanation:** If not waived, the borrower must repay the loan in full upon triggering the due-on-sale clause. ### Which of the following is a common situation where a due-on-sale clause is triggered? - [ ] Refinancing - [x] Selling the property - [ ] Home improvement - [ ] Taking out a second mortgage > **Explanation:** Selling the property commonly triggers the due-on-sale clause, requiring loan repayment. ### What does assuming a mortgage involve? - [ ] Taking over the interest payments only - [ ] Repaying the mortgage before transferring ownership - [x] A new buyer agreeing to the seller's mortgage terms - [ ] Forgiving part of the loan balance > **Explanation:** Assuming a mortgage means the new buyer agrees to the seller's mortgage terms, subject to lender approval. ### In what scenario might a lender waive the due-on-sale clause? - [x] If the interest rate is adjusted - [ ] If property taxes are current - [ ] During borrower’s financial hardship - [ ] For the first year of the mortgage > **Explanation:** A lender could waive the due-on-sale clause if the interest rate is adjusted or other satisfactory arrangements are made. ### Which clause ensures a lender's full repayment upon property transfer? - [ ] Prepayment penalty clause - [ ] Defeasance clause - [x] Due-on-sale clause - [ ] Mortgagee clause > **Explanation:** The due-on-sale clause ensures the lender receives full repayment if the property is transferred. ### How does a due-on-sale clause benefit lenders? - [ ] By providing lower interest returns - [ ] Through reducing borrower options - [x] By maintaining control over loan terms - [ ] By increasing property taxes > **Explanation:** It benefits lenders by maintaining control over loan terms and ensuring borrower creditworthiness upon property transfer.

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