Due on Sale Clause. Mortgagor shall not sell, convey or otherwise transfer any interest in the Premises (whether voluntarily or by operation of law), or agree to do so, without Mortgagee’s prior written consent, including (a) any sale, conveyance, encumbrance, assignment, or other transfer of (including installment land sale contracts), or the grant of a security interest in, all or any part of the legal or equitable title to the Premises, except as otherwise permitted hereunder; (b) any lease of all or any portion of the Premises (in which case Mortgagee’s consent shall not be unreasonably withheld or delayed); or (c) any sale, conveyance, encumbrance, assignment, or other transfer of, or the grant of a security interest in, any share of stock of Mortgagor, if a corporation or any partnership interest in Mortgagor, if a partnership, or any membership interest, if a limited liability entity, except in favor of Mortgagee. Any default under this Section shall cause an immediate acceleration of the Indebtedness without any demand by Mortgagee.
Due on Sale Clause. Without Seller’s prior written approval in Seller’s sole and absolute discretion, Buyer shall not Transfer (as hereinafter defined) the Property while the Seller Carry Back Loan is outstanding. If Buyer breaches this provision by Transferring the Property, the Seller Carry Back Loan shall become immediately due and payable in full. Buyer shall have the right to Transfer the Property while the Seller Carry Back Loan is outstanding. For purposes of this Addendum, the term “Transfer” means any sale, conveyance, lease, or encumbrance of the Property, whether voluntary or involuntary, including, without limitation, any easement, grant deed, lease, mechanics lien, tax lien, or secured loan.
Sample 1
Due-on-sale clause means a contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale of transfer of all or any part of the real property securing the loan without the lender's prior written consent. For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests. means a contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale of transfer of all or any part of the real property securing the loan without the lender's prior written consent. For purposes of this definition, asale or transfermeans the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests.
12 CFR § 591.2
Scoping language
For the purposes of this part, the following definitions apply:Due-on-sale clause exceptions may not pertain to you, but important to understand what they are, mortgage must be paid in full upon the sale of the property.3 min read
Updated October 30, 2020:
Due-on-sale clause exceptions may not pertain to you, but it's important to understand what they are. A due on sale clause stipulates that a mortgage must be paid in full upon the sale of the property. In other words, the lender can demand payment as soon as the property is sold. You may also hear this referred to as an acceleration clause.
Due-on-sale clauses protect lenders from interest rates that are below market. Note that this is not a law but, rather, a contractual right. So, if the property title should ever be transferred, the bank may be able to call the entire loan into payment.
These clauses are important when someone wants to sell a home without paying off the remaining balance on the loan. This allows the current lender to call the loan due when the title is transferred. If a lender feels like its security is going to be at risk, or if it believes it can make more money, a due on sale may be enforced. For example, if interest rates are rising, a lender may be interested in enforcing a due-on-sale clause.
When a due-on-sale clause is enacted, a seller cannot transfer their mortgage directly to the buyer. First, the proceeds from the sale must go toward paying off the mortgage. Then, the buyer will take out another home loan.
Due-On-Sale Clause Exceptions
A due-on-sale clause may not be easy to find in the midst of all the paperwork. Also, it may be written in as an acceleration clause, but the stipulations will remain the same. While you may have to sift through several pages to find it, nearly every loan created after 1988 contains an acceleration clause.
There are instances when a lender will not be able to exercise a due-on-sale clause:
- When a lien does not relate to the transfer of rights of occupancy
- When a leasehold interest does not contain an option to purchase and it's been three years or fewer
- When the borrower is deceased, and the property is transferring to a relative
- When the transfer is taking place between the children or spouse of the borrower
- When the transfer is occurring as a result of a decree from a separation, divorce, or incidental property settlement agreement
(Note: This list is not exhaustive.) Many of these exceptions can be attributed to the Garn-St. Germain Act of 1982. It put many of these stipulations in motion. For example, a lender would be unable to institute a due-on-sale clause if a piece of property was once owned by two parties and is now owned by a single party. The Garn-St. Germain Act is also responsible for the above exceptions pertaining to children, the death of a borrower, or exemptions pertaining to a living trust.
Living Trusts and Land Trusts
A land trust is one form of a revocable, living trust. The Garn-St. Germain Act has exempted these from due-on-sale provisions. Land trusts are created using two legal documents:
- Trust agreements between the grantors (or creators) of the trust and trustees (or those who define the trust agreement)
- Deeds between those who created the trust and the trustee
In these instances, a trustee will hold the title. Also, if that title is placed into a land trust, the due-on-sale clause will not be in violation as long as there's no change in occupancy.
Lenders will notice a real estate transfer in any of these ways:
- If there's a change of name on the deed
- If there's a different name on the check received for payment
- If there's a change in the hazard insurance beneficiary
If a title is transferred into a land trust, the new beneficiary will be appointed trustee. In this instance, the lender isn't likely to object because it will assume the seller has an estate planning device in place.
However, a lender will not be notified if the beneficiary of the trust is assigned. In this instance, the trustee will be the same. This reduces the chances of the lender uncovering the change. If a lender is using a servicing company, this becomes especially true.
If you need help with due-on-sale clause exceptions, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
It used to be common for mortgages to be assumable by prospective buyers. However, in 1982, Congress passed the Garn-St. Germain Depository Institutions Act, a section of which made due-on-sale clauses federally enforceable.
A due-on-sale clause is a provision in a loan or promissory note that enables lenders to demand that the remaining balance of a mortgage be repaid in full in the event that a property is sold or transferred. This clause protects lenders by preventing buyers from being able to assume a mortgage that has a below-market interest rate. However, there are some exceptions to this clause, including transfers to spouses, children and trusts.
Typically, when a property is purchased, the buyer will obtain a new mortgage to pay the seller for the house, and the seller will use those proceeds to pay off the remaining balance of their mortgage. This common practice exists in part because of due-on-sale clauses.
In order to ensure that sellers don’t transfer their mortgage to prospective buyers, lenders include a due-on-sale clause, also known as an alienation clause. This clause protects the lender's security against the possibility that a buyer will assume a mortgage that has a low interest rate or terms that the buyer would otherwise be unqualified to obtain.
When Do Mortgage Lenders Use A Due-On-Sale Clause?
The due-on-sale clause allows the lender to require immediate repayment of the mortgage balance when the mortgaged property is sold or transferred. Since a mortgage is a type of encumbrance or lien, lenders are automatically notified when a property that secures a loan is transferred.
Therefore, if a lender discovers that the borrower has attempted to transfer real property to a buyer without their consent, the lender can foreclose on the property.
How Do Lenders Determine When To Invoke A Due-On-Sale Clause?
While the due-on-sale clause is prevalent in contemporary mortgages, it’s up to the lender to determine whether the situation calls for the clause to be invoked. The lender is likely to do so if they:
- Feel their security is at risk in the hands of an unvetted buyer
- Believe they can make more money if the buyer applies for a new loan
However, the lender may be less likely to force the borrower to immediately pay off the mortgage in full if the market is weak and the lender is concerned that they will not ultimately be able to recoup their costs by foreclosing on the property.
Despite the prevalence of due-on-sale clauses, there are certain legal exceptions that negate lenders’ right to demand the full payment of the mortgage. These exemptions include:
- Divorce or legal separation: If the borrower files for divorce or legal separation, the property may be transferred to the spouse or child of the marriage without invoking the due-on-sale clause. However, the new owner must occupy the property for this to be the case.
- Inheritance: If the borrower dies and a relative inherits then occupies the home, the relative cannot be forced to pay off the remaining mortgage balance on demand. However, if the heir chooses not to occupy the home, the transferred title can trigger the due-on-sale clause. This exception is applicable to any circumstances in which the borrower transfers the property to a child or spouse.
- Living trusts: If the property is transferred into a living trust, as long as the borrower continues to occupy the property and remains the beneficiary of the trust, the lender cannot force the borrower to pay off the mortgage on demand.
- Joint tenancy: if the borrower entered a joint tenancy agreement when purchasing the house, a lender can’t enforce the due-on-sale clause in the event that the borrower dies. Instead, the surviving joint tenant automatically assumes the entire mortgage and can pay it off as initially planned.
What If I Live In A Deed Of Trust State?
In certain states like California, North Carolina, Georgia, Virginia and Texas, a deed of trust may be used in lieu of a mortgage. While deeds of trust are similar to mortgage agreements, they differ in two crucial ways.
- Title holder: The most obvious distinction is that deeds of trust require that a trustee be included in the real estate transaction. After a borrower finances and purchases a property, a trustee – who acts as a neutral third party – holds the title of the house or property as security until the borrower has repaid the entire loan.
- Foreclosure process: If the borrower is unable to repay the loan and ultimately defaults, the foreclosure process is also different. While lenders must go through a judicial foreclosure process in the case of a mortgage, this is not the case for deeds of trust. For a deed of trust state, the lender can execute a non-judicial foreclosure, which means that they don’t need to go through the lengthy legal process and instead are authorized to sell the property as soon as the borrower defaults.
Regardless of these important differences, both mortgages and deeds of trust include due-on-sale clauses. So, it doesn’t matter which financing instrument your state uses when it comes to these acceleration provisions.
The legal terms stipulated in a mortgage can be complex, so let’s go through and review some of the common frequently asked questions and concerns that due-on-sale clauses tend to raise.
What does it mean for a mortgage to be assumable?
An assumable mortgage allows a new buyer to legally take possession of the seller’s existing loan instead of obtaining their own financing to fund the purchase of the property.
Is a due-on-sale clause the same as an acceleration clause?
Due-on-sale clauses – also called alienation clauses – are a type of acceleration clause. Similar to due-on-sale clauses, acceleration clauses allow your mortgage lender to demand full repayment of your home loan. The difference is that a due-on-sale clause is triggered when you sell or transfer your property without the lender’s consent, whereas an acceleration clause goes into effect when you miss mortgage payments, file for bankruptcy or fail to fulfill your loan requirements in some other way.
Do all mortgages have a due-on-sale clause?
Although the majority of mortgages contain due-on-sale clauses, there are still some mortgages that are assumable. Such mortgages include the Department of Veterans Affairs (VA), Federal Housing Administration (FHA) and United States Department of Agriculture (USDA) loans. Even though these types of loans are assumable, prospective buyers must still qualify for the loan.
If a mortgage contains a due-on-sale clause, can the borrower still pay off the mortgage early?
Yes. A due-on-sale clause does not impact a borrower’s ability to pay off their mortgage early. However, before doing so, you should check to ensure that your lender doesn’t charge prepayment penalties.
What happens if a borrower sells or transfers the property without informing their lender?
As mentioned, lenders are notified when properties are transferred to another party, so the lender will likely exercise their acceleration rights and can begin foreclosure proceedings. Therefore, borrowers should not try to avoid triggering the due-on-sale clause by transferring the property behind the lender’s back. If they do, it’s likely that the new owner will lose the property through foreclosure.
Are there circumstances in which the lender would not invoke the due-on-sale clause?
Lenders are less likely to invoke the due-on-sale clause when they fear that they’ll be unable to recover the funds loaned to the borrower. Therefore, lenders may allow the mortgage to be assumed by the prospective buyer if the housing market is weak, and the lender believes doing so will increase the chances that the loan will be repaid.
The due-on-sale clause protects your lender by preventing prospective buyers from assuming your mortgage. Remember that if you try to sell or transfer the title of your property, you’ll have to immediately pay off the remaining balance of your mortgage with the proceeds from your sale.
If you’re learning about due-on-sale clauses because you’re planning to sell your current house and buy another, or because you’re buying a house for the first time and want to fully understand the terms of the mortgage you’ll be taking on, get started today with an initial approval.
Get approved with Rocket Mortgage® – and do it all online. You can get a real, customizable mortgage solution based on your unique financial situation.
Apply Online