A due-on-sale clause is a common feature in most U.S. mortgage agreements that safeguards lenders against losing interest income if a property changes ownership. This clause mandates that the full remaining mortgage balance must be paid immediately upon the sale or transfer of the property, unless an exception applies.
Why Do Lenders Use a Due-on-Sale Clause?
Lenders provide mortgages expecting to earn interest over the loan’s term. If a borrower transfers the property to a new owner who assumes the existing mortgage without the lender’s consent, the lender could lose the ability to adjust the loan terms to current market rates, especially if rates have increased. The due-on-sale clause protects the lender’s financial interest by requiring loan repayment whenever there is a change in ownership.
How Does the Due-on-Sale Clause Work?
Included in nearly all mortgage contracts, the clause triggers when ownership transfers occur. This includes sales, gifting the property, adding someone to the deed, or transferring the title to a trust or entity. At the point of such a transfer, the borrower must repay the remaining balance in full. For example, if you buy a home with a $300,000 mortgage at 4% and sell it years later when $200,000 remains, the due-on-sale clause means the full $200,000 plus any fees must be paid at closing, preventing the buyer from simply taking over the old loan without lender approval.
Exceptions to the Due-on-Sale Clause
Federal law, under the Garn-St. Germain Depository Institutions Act of 1982, outlines specific exceptions where lenders cannot enforce this clause, including:
- Transfer to a relative upon the borrower’s death.
- Transfer to a spouse or child if the borrower continues occupying the home.
- Transfers due to divorce or legal separation where one spouse retains the property.
- Transfers into an inter vivos trust in which the borrower remains a beneficiary and occupant.
- Lease with an option to purchase for less than three years.
These exceptions allow some flexibility for estate planning and family transfers but require careful adherence and documentation.
Practical Examples
- Selling a Home: When you sell your home, the sale proceeds typically pay off your remaining mortgage balance due to the clause.
- Adding Family Members: Adding a relative to the deed might trigger the clause unless an exemption applies.
- Estate Planning: Transferring your home to a living trust is generally subject to this clause unless the trust and occupancy meet federal exemption criteria.
Who Should Be Concerned?
- Homeowners: Understanding your mortgage’s due-on-sale clause is vital before selling, gifting, or transferring your home to avoid unexpected loan demands.
- Buyers: Knowing whether a mortgage is assumable (rare today due to this clause) is crucial if intending to take over an existing loan.
Important Considerations and Tips
- Review Your Mortgage Documents: Confirm if your contract contains the due-on-sale clause and understand its exact terms.
- Coordinate Loan Payoff at Closing: Budget for paying off your remaining mortgage when selling.
- Check for Assumable Loans: Some government-backed loans (FHA, VA) may have assumability options. See our article on Loan Assumption.
- Consult Professionals: Speak with your lender or a real estate attorney before transferring property titles to avoid triggering this clause inadvertently.
Comparison to Related Terms
| Feature | Due-on-Sale Clause | Assumable Mortgage | Prepayment Penalty |
|---|---|---|---|
| What it is | Lender demands full loan repayment on sale/transfer. | Buyer legally takes over seller’s existing mortgage. | Fee charged for paying off loan early. |
| Trigger | Sale or ownership transfer of property. | Buyer’s and lender’s approval. | Early payoff of loan principal. |
| Purpose for Lender | Protects against lost interest income. | Approves new borrower’s creditworthiness. | Discourages early repayments. |
| Impact on Seller | Must pay off mortgage at sale. | May be released from liability if approved. | May reduce profit due to fees. |
| Impact on Buyer | Usually requires new mortgage. | Takes existing loan terms. | Not applicable unless loan assumed. |
| Commonality | Very common in residential mortgages. | Rare in modern loans; more common in FHA/VA loans. | Less common but still exists. |
| Federal Exemptions | Yes, for family transfers, inheritances, etc. | N/A (approval process is built-in). | Generally not applicable. |
Common Misconceptions
- Adding someone to the deed always triggers the clause unless exempt.
- Most conventional loans are not assumable due to this clause.
- Ignoring the clause on sale can lead to foreclosure actions even after transferring property.
Frequently Asked Questions
Q: Does the due-on-sale clause apply to home equity loans or HELOCs?
A: Yes, most home equity loans and lines of credit include due-on-sale clauses requiring payoff upon property sale.
Q: Can a lender waive the due-on-sale clause?
A: Yes, but it is at the lender’s discretion. Waivers or loan assumptions require lender approval and sometimes fees.
Q: What about transferring property to an LLC or trust?
A: Transfers to LLCs or trusts usually trigger the clause unless exceptions apply or the lender approves.
For detailed legal advice about exceptions and transfers, consult your mortgage documents and a qualified real estate attorney.
Sources:
- Consumer Financial Protection Bureau, Mortgage Servicing & Loss Mitigation: https://www.consumerfinance.gov/
- Investopedia, Due-on-Sale Clause: https://www.investopedia.com/terms/d/due-on-sale-clause.asp
- NerdWallet, What Is a Due-on-Sale Clause?: https://www.nerdwallet.com/article/mortgages/due-on-sale-clause
- FinHelp.io Glossary: Loan Assumption, Garn-St. Germain Act (Loan Assumption), Mortgage Acceleration Clause
This comprehensive guide clarifies the due-on-sale clause, helping homeowners and buyers navigate mortgage obligations when transferring property.