Due-on-sale Clause
Definition and meaning of Due-on-sale Clause in real estate.
A due-on-sale clause is a provision in a mortgage contract that requires the borrower to pay off the remaining loan balance in full when the property is sold or transferred.
In more detail
This clause protects the lender by preventing a buyer from assuming, or taking over, an existing mortgage that may have a lower interest rate than current market rates. When a property changes hands, the seller must use the sale proceeds to clear the debt, and the new buyer must secure their own financing.
While most conventional mortgages contain this clause, certain government-backed loans, such as FHA or VA loans, are typically assumable and do not feature this restriction. Transferring a property to a trust or a relative can sometimes trigger this clause, although federal law provides specific exceptions for personal residences.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Alienation clause |
| Applies to | Conventional mortgages |
| Federal oversight | Garn-St. Germain Depository Institutions Act |
When Sarah sold her home to buy a larger one, the due-on-sale clause in her mortgage meant she had to pay off her outstanding mortgage balance at the closing rather than letting the buyer take over her low-interest loan.
Frequently asked questions
Can a lender enforce a due-on-sale clause if I transfer my home to a family trust?
Under federal law, lenders are generally prohibited from enforcing the clause if the property is transferred into an inter vivos trust where the borrower remains the beneficiary and occupant.
Are FHA loans subject to a due-on-sale clause?
No, FHA loans do not contain standard due-on-sale clauses, meaning they are usually assumable by qualified buyers subject to lender approval.