The following article will cover all aspects of a Due-On-Sale Clause including: What is a Due-On-Sale Clause, How does a Due-On-Sale Clause work, What are the types of Due-On-Sale Clause mortgages and the key factors of a Due-On-Sale Clause.
What Is a Due-on-Sale Clause?
A due-on-sale clause is a condition in a mortgage contract that compels the borrower to repay the lender in full upon the sale or transfer of a portion or complete interest in the property that secures the loan. Mortgages with a due-on-sale provision cannot be assumed by the next owner of the property.
How does a Due-on-Sale Clause Work?
A due-on-sale provision allows a lender to demand complete repayment of a loan if the borrower sells the collateral used to secure it. This sort of provision is commonly seen in house mortgages, and it restricts a homeowner from selling their home before paying off their loan.
The lender may foreclose on the property if the borrower tries to sell it without the lender’s permission. Due-on-sale provisions are included in the majority of mortgages issued in the United States. Prior to due-on-sale provisions, most property purchases were financed with assumable mortgages, which meant that the loan obligations would pass to the next owner if the house was sold.
This was to the mortgage lender’s detriment, especially if interest rates had risen since the loan was originated.
What Types of Mortgages Do Not Have a Due-on-Sale Clause?
Due-on-sale provisions are included in the majority of institutional mortgages issued in the United States. The Federal Housing Administration, the Department of Veteran’s Affairs, and the Department of Agriculture are the most common exceptions. Before inheriting the loan, each of these organizations needs the new buyer to fulfil specific criteria.
Key Factors with a Due-on-Sale Clause
A due-on-sale condition in a mortgage stipulates that if the property is sold, the borrower must repay the lender in full.
Assumable mortgages allow the new owner of the property to assume the current loan.
Even when mortgages have a due-on-sale clause, there are occasions when the lender cannot legally invoke it or may voluntarily choose not to.
In the case of a divorce, separation, or inheritance, a due-on-sale clause does not prohibit property from changing hands.
Financial Consultant and Author