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A due-on-sale clause is a standard provision in most mortgage agreements that requires the full loan balance to be repaid immediately upon the sale or transfer of the property title. For the vast majority of homeowners, this clause is triggered automatically at closing, where the sale proceeds are used to pay off the existing loan. However, this clause can create significant financial risks in non-traditional property transfers, such as seller-financing a sale or transferring a home to a family member. Understanding this clause is critical to avoiding unexpected financial liabilities.
A due-on-sale clause (also known as an acceleration clause) is a term in a mortgage contract that gives the lender the right to demand immediate repayment of the entire outstanding loan balance if the property securing the loan is sold or the ownership is transferred. In practice, this means you cannot transfer your existing mortgage to the home buyer, nor can you take the loan with you to a new property. When you sell your home in a standard transaction, the clause is triggered, and the loan is paid off directly from the closing proceeds, making the process seamless for most sellers.
Lenders include this clause primarily for risk management. A mortgage is underwritten—the process a lender uses to assess a borrower's creditworthiness—based on the original borrower’s financial profile, credit score, and income, as well as the specific property acting as collateral. The lender has not assessed the new buyer's ability to pay. The clause protects the lender by ensuring the loan is cleared, allowing them to control their risk exposure. It prevents the transfer of a potentially risky loan to an unvetted party.
Yes, some government-backed loans are designed to be assumable, meaning they lack a standard due-on-sale clause. These include VA loans (for veterans), FHA loans (Federal Housing Administration), and USDA loans (U.S. Department of Agriculture). An assumable mortgage allows a qualified buyer to take over the seller's existing loan, including its interest rate and terms. This can be highly advantageous when current market interest rates are higher than the rate on the assumed loan.
It is important to note that assumption is not automatic. The new buyer must still apply and meet the lender's standard credit and income qualifications to be approved for the assumption.
Under the Garn-St. Germain Depository Institutions Act of 1982, a key piece of federal legislation, certain property transfers are exempt from triggering the due-on-sale clause. These exceptions protect homeowners during specific life events. Exempt transfers include:
In these scenarios, the existing mortgage typically remains in place. However, the new owner or trustee must formally notify the lender to ensure compliance and avoid complications.
The due-on-sale clause is most problematic in situations outside a standard sale. If a lender discovers a transfer that triggers the clause, they can call the loan due, requiring immediate full payment. High-risk scenarios include:
Before pursuing any non-standard property transfer, it is essential to review your mortgage agreement carefully and, based on our experience assessment, consult with a real estate attorney to understand the potential risks.
The key takeaway is that the due-on-sale clause is a standard risk-management tool for lenders that becomes a critical factor in any property transfer that is not a traditional sale. Proactively reviewing your mortgage documents and understanding the exemptions under the Garn-St. Germain Act can help you avoid unexpected financial liabilities and ensure a smooth transition.
