What Is a Due-on-Sale Clause?

When a homeowner sells a property with a mortgage, in most cases, they will need to pay off the mortgage at closing. A due-on-sale clause specifies that the remaining balance of a mortgage must be paid in full if the property is sold or transferred. 

Before 1982, most mortgages were assumable, meaning there was no due-on-sale clause. Since the Garn-St. Germain Depository Institutions Act, these clauses became federally enforceable and more common in mortgages. Read on to understand due-on-sale clauses.

Understanding Due-on-Sale Clauses

A due-on-sale clause is a provision in a mortgage contract that allows the lender to demand full payment of the loan if the property securing the mortgage is sold or transferred by the borrower. This mortgage provision requires borrowers to repay lenders in full when a property is sold. 

While a due-on-sale clause gives lenders the legal right to request repayment of the loan, there are certain cases where they cannot do so. For example, a property may change hands following a divorce, separation or inheritance without triggering a due-on-sale clause. Sometimes, lenders may also voluntarily choose not to invoke a due-on-sale clause. 

Federally insured loans like U.S. Department of Agriculture (USDA)-, Veterans Affairs (VA)- or Federal Housing Administration (FHA)-backed loans don't have a due-on-sale clause. Instead, these mortgages are transferable.

How Does a Due-on-Sale Clause Work?

A due-on-sale clause in a mortgage means that a lender can demand full repayment of a loan if the borrower sells the home. These clauses protect the lender and prevent the homeowner from selling the home and failing to repay the debt. If the homeowner attempts to sell the property without the lender's consent, the lender has the right to foreclose on the property. 

Nearly all mortgages that aren't government-backed in the U.S. have due-on-sale clauses. Any assumable mortgage won't have a due-on-sale clause, as the new buyer may assume the loan. 

Why Do Lenders Include Due-on-Sale Clauses in Mortgage Contracts?

Lenders include due-on-sale clauses to protect their interests and ensure that they can renegotiate the loan terms if the ownership of the property changes hands. Otherwise, when interest rates rise significantly, lenders may not be able to take advantage of interest increases. 

For example, without a due-on-sale clause, when a homeowner sells a home within 10 years of getting a 30-year mortgage, the lender would be locked into the original interest rate with the new homeowner for another 20 years. With a due-on-sale clause, the new homeowner must apply for a new mortgage at current interest rates.  

This clause also helps to prevent borrowers from transferring their mortgages to new owners without the lender's knowledge or approval.

What’s the Difference Between a Due-on-Sale Mortgage and an Assumable Mortgage?

A due-on-sale mortgage and an assumable mortgage are opposites in how they treat the sale of a property. With a due-on-sale mortgage, the full value of the loan is due when the property is sold or transferred. With an assumable mortgage, such as a government-backed loan, the new homebuyer can assume the mortgage of the previous homeowner. This will allow them to make mortgage payments with interest rates and terms secured by the previous owner. 

What Are the Exceptions to the Enforcement of Due-on-Sale Clauses?

Individual lenders may have various exceptions to due-on-sale clauses or may choose not to invoke the clause. However, in general, these clauses cannot be invoked when the transfer is the result of a divorce or a borrower's death. 

Some states also have laws limiting the enforceability of due-on-sale clauses, particularly for certain transfers, such as to family members or transfers resulting from certain financing arrangements. You can speak with a real estate attorney in your state to understand possible exceptions for your situation. 

What Happens if a Due-on-Sale Clause Is Triggered?

If a due-on-sale clause is triggered, the lender may demand full repayment of the loan. If the borrower cannot repay the loan, the lender may initiate foreclosure proceedings to recover the outstanding debt. It's important to understand whether you have a due-on-sale clause before transferring or selling a property. 

For example, some sellers may offer seller financing to a buyer, but if the mortgage has a due-on-sale clause, both the existing owner and the homebuyer risk triggering the clause and foreclosure proceedings.

In addition to invoking a due-on-sale clause when the property is sold, lenders may invoke a due-on-sale clause if they feel their security is at risk because of an unvetted buyer. Likewise, if the lender believes they can make more money if the buyer applies for a new loan, they may invoke the clause. Finally, if the market is weak and the lender is concerned about recouping its costs, it may invoke the due-on-sale clause and foreclose on the property.

Protecting Your Home

Understanding the impact of a due-on-sale clause is important to protect your investment in a property. While these clauses are designed to protect lenders, lenders are more willing to approve buyers for a mortgage. If you don't want a due-on-sale clause on your property, talk to your mortgage lender about VA, USDA or FHA loans. Ready to get started? Find some of the best VA or FHA loans here. 

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