A due-on-sale clause in a mortgage contract is a provision that allows the lender to demand full payment of the mortgage balance when the borrower sells or transfers ownership of the property securing the loan. It is also known as an “acceleration clause” or “due-on-transfer clause.”
The due-on-sale clause is designed to help protect the lender’s security-interest in the property, and prevent the borrower from transferring loan responsibility to someone else. For example, if a borrower has a high loan balance and decides to sell the property to someone who is not able to pay it off, the due-on-sale clause gives the lender the right to demand full repayment from the borrower in order to protect its investment.
When Does the Due-on-Sale Clause Become Effective?
The due-on-sale clause is generally included in the original mortgage agreement between the borrower and lender. In most cases, the clause becomes effective when the borrower transfers ownership of the property, whether through sale, gift, or inheritance. When ownership is transferred, the lender can call the loan immediately due and payable.
In some cases, the due-on-sale clause may also be triggered when a borrower transfers the title or rights to the property in a way that does not involve transferring ownership, such as entering into a lease agreement or taking out a second mortgage on the property.
Are There Exceptions to the Due-on-Sale Clause?
Yes. The due-on-sale clause can typically be avoided in certain cases, such as when the borrower transfers the property to a family member or the borrower himself/herself. In addition, lenders will often allow a borrower to transfer the loan to another party without triggering the clause in cases where the transfer does not reduce the security of the loan, such as when the borrower takes out a home equity loan.
Furthermore, the due-on-sale clause is not applicable in certain states, or to certain types of loans, such as FHA loans, VA loans and HUD-assisted loans.
The Bottom Line
The due-on-sale clause is a provision in many mortgage contracts that allows lenders to demand full payment of the loan balance when the borrower sells or otherwise transfers ownership of the property securing the loan. In some cases, the clause may be avoided or circumvented, but in most cases, it will be triggered when ownership of the property is transferred.