If you have a mortgage, you probably also have an alienation clause. An alienation clause gives mortgage lenders the right to request full and immediate loan repayment when the home is sold or transferred. Lenders include an alienation clause in mortgage contracts to protect their interests in the property and prevent you from handing over the title of your home and defaulting on the loan. Read on to understand when an alienation clause may take effect, what it includes and how it may affect you when selling your home.
What Is an Alienation Clause?
An alienation clause, commonly referred to as a due-on-sale clause, is a clause in your mortgage contract that requires you to pay the remaining mortgage balance at the sale or transfer of the home. These clauses protect lenders and their stake in the real estate asset.
An alienation clause will take effect regardless of the reason for transfer and whether the transfer is voluntary or involuntary. An alienation clause is standard in all mortgages that aren't assumable. Assumable mortgages will not have an alienation clause.
Alienation clauses came into effect after the Garn-St. Germain Act of 1982, which overrides state law to make alienation clauses enforceable nearly nationwide.
How Does the Alienation Clause Work?
Whenever a mortgaged property transfers ownership, an alienation clause comes into effect, requiring the previous owner to repay the loan’s remaining balance immediately. The proceeds from the sale go first to the lender to pay off the remaining principal of the mortgage and any accrued interest.
With an alienation clause, the homeowner cannot transfer their mortgage to a new owner. Any potential buyers for the property must obtain a new mortgage and financing. Whether a lender chooses to enforce an alienation clause varies by circumstance.
Alienation vs. Acceleration Clause
While they're often confused, alienation clauses and acceleration clauses have different roles in real estate. An alienation clause requires the borrower to pay back the loan in full on the sale or transfer of the property. An acceleration clause, in contrast, comes into effect if the homeowner does not pay back the mortgage or is in the process of foreclosure.
An acceleration clause is only applied if you fail to meet the terms of the loan agreement. If you miss regular mortgage payments, for example, the lender may initiate an acceleration clause that demands immediate full repayment of the loan. If you aren't able to repay the loan, the lender may foreclose on the property.
Why Do Mortgage Lenders Use the Alienation Clause?
Mortgage lenders use alienation clauses to protect their property interests and prevent asset loss without loan repayment. Generally, a mortgage lender uses a property title and an alienation or due-on-sale clause to protect their interests.
Before the 1982 Garn-St. Germain Act made alienation clauses enforceable, lenders could only enforce a due-on-sales clause if they could prove the transfer harmed its security or interest in the property. Since 1982, lenders have been better able to protect their interests.
Generally, the mortgage lender will hold the property title until you pay off the mortgage. The title is used as collateral on the loan. As additional insurance, lenders have a due-on-sale clause requiring borrowers to repay the loan in full at the sale.
An alienation clause prevents the homeowner from selling the property to a new buyer who then assumes the previous owner's interest rate, which could be substantially lower than current mortgage rates.
For that reason, assumable mortgages, such as federally-backed mortgages from the U.S. Department of Agriculture (USDA), Veterans Affairs (VA) or Federal Housing Administration (FHA), don't have an alienation clause and instead allow homeowners to transfer the mortgage on the sale of the property.
Many lenders don’t actively enforce an alienation clause when the property hasn’t been sold, allowing you to transfer the property deed to a trust or limited liability company (LLC) without triggering the need for mortgage repayment. If in doubt, speak with your lender before making the transfer. If you need to alter the home's title or transfer the deed, the safest option is first to speak with the lender to avoid issues down the road.
Alienation Clause Exceptions
While alienation clauses are standard in most mortgage contracts, they’re not in each one nor are they always enforceable.
An alienation clause will not be triggered in certain instances, even if the property is transferred to a new owner. These include:
- Assumable mortgages: There won't be an alienation clause if the mortgage is assumable. The new owner can assume the existing mortgage without needing to pay it off immediately.
- Second mortgage: If you take out a second mortgage, such as a home equity loan or home equity line of credit (HELOC), the original lender cannot demand immediate repayment of the original loan.
- Living trust: If the property is transferred into a living trust, as long as you remain the occupant and true beneficiary, the mortgage lender cannot activate an alienation clause.
- Divorce: In case of divorce in which the property transfers to one party, the lender cannot demand immediate mortgage repayment through an alienation clause.
- Death: If the property title is transferred because of the death of the original owner, an alienation clause is unenforceable as long as the property is inherited by a spouse, child or relative who either already occupies or intends to occupy the property.
- Joint tenancy: Related to death, if a joint tenant, like a surviving spouse, assumes the mortgage, the lender cannot activate an alienation clause.
Can an Alienation Clause Help You?
While the primary purpose of an alienation clause is to protect the mortgage lenders' interest, an alienation clause also helps you to secure a mortgage. With more robust protections, mortgage lenders are more willing to lend to a greater range of potential borrowers or even offer better rates. And the exceptions to due-on-sale clauses ensure that your mortgage won't be due immediately if the worst happens.
If you want a mortgage without an alienation clause, consider a federally backed or private assumable mortgage. You can find the best online mortgage lenders or learn how to get FHA loan preapproval. Then, you can find the best VA loans or FHA loans or understand the difference between a USDA and a conventional mortgage here.
Frequently Asked Questions
Can alienation clauses be enforced?
Yes, alienation clauses can be enforced. If you sell a property or transfer the title without informing the lender, the lender can decide whether it wants to enforce the alienation clause.
Can alienation clauses be waived?
Generally, no, an alienation clause cannot be waived. It comes into effect automatically on the transfer or sale of the property. There are a few exceptions. A lender can waive the alienation clause and transfer the property and mortgage to a new buyer, although this is rare.
Can alienation clauses be negotiated?
Generally, you cannot negotiate an alienation clause. If you plan to sell your property, you could speak to the lender and ask about the possibility of transferring the mortgage and alienation clause to the potential buyer.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.