Definition:
A due-on-sale clause is a provision in a mortgage agreement that requires the full loan balance to be paid off immediately if the property is sold or transferred to someone else.
Example:
Mark has a mortgage on his home. When he decides to sell the house to his friend Sarah, his lender enforces the due-on-sale clause. This means Mark must pay off the remaining balance of his mortgage in full before the property can legally be transferred to Sarah.
Explanation:
The due-on-sale clause protects lenders by ensuring that their loan is repaid if the property changes hands. It prevents a new owner from taking over the existing mortgage—especially if that person doesn’t meet the lender’s financial requirements or current interest rate terms.
When a home is sold or ownership is transferred, the clause gives the lender the right to demand full repayment of the loan, even if the borrower has been making regular payments. This allows the lender to reissue a new mortgage under updated terms, often at current interest rates, which could be higher than the original loan.
Most modern mortgage agreements include this clause, particularly in conventional loans.
Why is the Due-on-Sale Clause Important in Real Estate Transactions?
The due-on-sale clause is important because it affects how property can be sold or transferred. For buyers, it means they cannot simply "take over" an existing loan unless the lender approves a new mortgage in their name. For sellers, it means they need to plan to pay off their existing loan in full at the time of sale.
Understanding this clause helps avoid legal or financial surprises during a transaction. It ensures that all parties—buyers, sellers, and lenders—are clear on their rights and responsibilities when ownership of a property changes.