Due-on-Sale Clause
A due-on-sale clause is a provision included in most mortgage agreements. It stipulates that the borrower must repay the remaining loan balance in full if the property securing the mortgage is sold or transferred. This clause prevents borrowers from transferring the mortgage to a new buyer without the lender’s consent, thereby enabling lenders to control the interest rates and secure proper compensation should the property change hands.
Examples
Example 1: Collins owes $200,000 on a mortgage loan against her house at a 4% interest rate. She wants to sell the house to a buyer who will assume the mortgage. The lender informs her that the $200,000 loan is due upon the sale of the house. Therefore, it cannot be assumed by the buyer unless the lender waives the due-on-sale provision. In this case, the lender might consider waiving the clause if the interest rate is adjusted to 6%.
Example 2: John and Emily have a mortgage on their property with a due-on-sale clause. When they decide to sell their property, they realize they need to either pay off the remaining mortgage amount or obtain the lender’s approval for the buyer to assume the loan under new terms that satisfy the lender.
Frequently Asked Questions (FAQs)
Q: Can a lender enforce a due-on-sale clause?
A: Yes, lenders can enforce a due-on-sale clause, requiring the borrower to repay the outstanding loan balance if the property is sold or transferred.
Q: What happens if I violate a due-on-sale clause?
A: If a borrower violates the due-on-sale clause by transferring the property without repaying the loan or obtaining lender consent, the lender may accelerate the loan, meaning the full loan balance becomes immediately due.
Q: Can a due-on-sale clause be negotiated or waived?
A: In certain circumstances, lenders may agree to waive or negotiate the due-on-sale clause, often in exchange for modified terms, such as a higher interest rate or a short application to assess the borrower’s creditworthiness.
Q: Are there any exceptions to the due-on-sale clause?
A: Exceptions to the due-on-sale clause may apply in cases such as transfers between family members, inheritance, divorce settlements, and certain types of refinancing under federal law.
- Assumable Mortgage: A mortgage that can be transferred to a new borrower who continues to make payments under the same terms as the original loan.
- Acceleration Clause: A provision in a mortgage that allows the lender to demand full repayment of the loan upon default or other contractual breaches.
- Lock-In Clause: A clause that prevents the borrower from prepaying the loan or refinancing until a specified period has elapsed.
- Interest Rate Clause: A provision that allows the lender to adjust the interest rate under specific circumstances, such as after a certain period or change in market conditions.
Online Resources
- Consumer Financial Protection Bureau - Visit Their Website
- Federal Housing Finance Agency - Visit Their Website
- Investopedia - Real Estate Terms
References
- “Real Estate Principles” by Charles J. Jacobus
- “Mortgage Finance” by William B. Brueggeman and Jeffrey D. Fisher
- “The Mortgage Encyclopedia” by Jack Guttentag
Suggested Books for Further Studies
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
- “Principles of Real Estate Practice” by Stephen Mettling and David Cusic
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold
Real Estate Basics: Due-on-Sale Clause Fundamentals Quiz
### A due-on-sale clause typically requires the loan to be repaid in full if which event occurs?
- [x] The property is transferred or sold.
- [ ] The loan balance reaches zero.
- [ ] The borrower starts a new job.
- [ ] The property's value increases.
> **Explanation:** The due-on-sale clause requires the remaining loan balance to be repaid in full if the property is sold or otherwise transferred to another party.
### How does a due-on-sale clause benefit the lender?
- [x] Allows the lender to regain control over the interest rate during a new sale.
- [ ] Reduces the outstanding balance immediately.
- [ ] Forces the borrower to stay in the property indefinitely.
- [ ] Lowers the monthly mortgage payments for the borrower.
> **Explanation:** It benefits the lender by allowing them to regain control over the interest rate and ensure the security of the loan when the property is transferred.
### What should a homeowner do before selling a house with a due-on-sale clause?
- [ ] Ignore the clause and proceed with the sale.
- [ ] Consult the lender regarding the clause and potential repayment.
- [ ] Lower the selling price to expedite the sale.
- [x] Consult the lender regarding the clause and potential repayment.
> **Explanation:** The homeowner should consult the lender to discuss the implications of the due-on-sale clause and ensure compliance before proceeding.
### What might happen if a homeowner attempts to sell their property without addressing a due-on-sale clause?
- [ ] The new buyer will assume the mortgage automatically.
- [x] The lender may demand immediate full repayment of the loan.
- [ ] The sale will be voided.
- [ ] The interest rate on the mortgage will decrease automatically.
> **Explanation:** The lender may demand immediate full repayment of the remaining loan balance, as allowed by the due-on-sale clause.
### When can a due-on-sale clause typically be waived by the lender?
- [ ] During any property sale transaction unconditionally.
- [ ] When the borrower has been a long-time customer.
- [x] When the lender agrees upon a modified term, such as a higher interest rate.
- [ ] Only upon death of the borrower.
> **Explanation:** The lender may waive the clause if they agree to modified terms for the new borrower, like an increased interest rate post-evaluation.
### What kind of mortgage allows transfer to a new borrower under the same terms?
- [ ] Interest-only mortgage
- [ ] Negative amortization mortgage
- [x] Assumable mortgage
- [ ] Graduated payment mortgage
> **Explanation:** An assumable mortgage allows the transfer to a new borrower under the same original terms.
### Can the due-on-sale clause be forced in all property transfers?
- [x] No, specific exceptions exist.
- [ ] Yes, it's applicable in every case.
- [ ] Only when court agrees.
- [ ] Normally, there is no legal enforcement needed.
> **Explanation:** Specific exceptions exist, such as transfers under federal law between family members, inheritance, or divorce settlements.
### How might the lender react if a property transfer happens without consulting them on due-on-sale terms?
- [ ] Ignore the transfer and continue with the previous terms.
- [x] Demand immediate loan repayment.
- [ ] Automatically reduce the interest rate.
- [ ] Impose no action as insurance covers lender.
> **Explanation:** Lenders can demand immediate loan repayment if a property transfer happens without their notice or approval.
### Is a due-on-sale clause legally applicable under an assumable mortgage?
- [ ] Always, it cannot be waived at all.
- [ ] Not applicable in any case.
- [x] May be enforced if the transfer doesn't meet lender terms.
- [ ] Valid only before the mortgage signing.
> **Explanation:** Assumable mortgages tend to bypass due-on-sale, but lenders can enforce due-on-sale if the transfer isn't aligned as per worked terms.
### Why do lenders prefer including due-on-sale clauses in mortgage agreements?
- [x] To maintain control over interest rates and loan security.
- [ ] To make property sell slower and control market.
- [ ] Ensures borrower’s long-term ownership.
- [ ] Allows for decreasing interest rates post-purchase.
> **Explanation:** To maintain contractual control over the interest rates securing the loan value and minimize risks during property change.
