Due-on-Sale Clause

A due-on-sale clause is a provision in a mortgage contract that requires the mortgage to be repaid in full upon a sale or conveyance of partial or full interest in the property that secures the mortgage. This provision as also sometimes referred to as an acceleration clause. Mortgages with a due-on-sale clause are not assumable. This clause helps protect lenders against below-market interest rates.

A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage. The holders of a below-market-interest-rate mortgage – or a mortgage-backed security, asset-backed security or collateralized debt obligation backed by a below-market-interest-rate mortgage – generally favor early retirement of that mortgage.

Because of the due-on-sale clause, when homeowners sell their houses, they cannot transfer the mortgage to the buyer. They must use the sale proceeds to pay off the mortgage, and the buyer must obtain a new mortgage. If it were not for the due-on-sale clause, the mortgage that could be assumed with a home purchase might be part of homebuyers’ purchasing decisions.

It is possible that if a homeowner attempts to circumvent this clause when selling the property to a buyer, the lender might initiate foreclosure proceedings and potentially cause the prospective buyer to lose the home in the process. There may also be instances where the lender might not put this clause into action even when faced with the probability of losing a portion of the principal and interest they are due. For example, the market conditions of a real estate collapse might compel lenders to be more amenable to any offer that might allow them to recoup some of their losses.

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or 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 his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.