Understanding Due-On-Sale Clause

General Advice

AUG 10, 2023

When it comes to real estate transactions, various legal and financial terms can be overwhelming, especially for first-time homebuyers or investors. One such term that holds significant importance in mortgage agreements is the "due-on-sale clause."

What is the Due-on-Sale Clause?

The due-on-sale clause, also known as an "alienation clause" or "acceleration clause," is a provision commonly found in mortgage contracts or deeds of trust. It gives the lender the right to demand full repayment of the outstanding loan balance if the property is sold or transferred to a new owner. In essence, the clause accelerates the mortgage, making the entire loan amount due immediately upon the sale or transfer of ownership.

How Does the Due-on-Sale Clause Work?

When a homeowner decides to sell their property, the due-on-sale clause can have significant implications. If the mortgage contains this clause, the lender has the option to invoke it when the property changes hands. The new buyer would then be responsible for either paying off the existing mortgage in full or obtaining a new mortgage to finance the purchase.

Implications for Homeowners

Mortgage Repayment

If you are a homeowner planning to sell your property and your mortgage contains a due-on-sale clause, you will need to settle the outstanding loan balance before transferring ownership to the buyer. This could impact your financial planning, especially if you were relying on the sale proceeds to fund your next housing investment.

Negotiating with the Buyer

The presence of the due-on-sale clause might make it more challenging to negotiate a deal with potential buyers. They may be hesitant to assume the existing mortgage or arrange for a new loan, potentially affecting the sale process.

Refinancing Considerations

Homeowners looking to refinance their mortgage should be aware that some lenders may consider refinancing as a "sale" triggering the due-on-sale clause. However, there are instances where lenders may choose not to enforce the clause if the borrower is in good standing and agrees to new terms.

Implications for Property Investors

Financing Strategies

For real estate investors, the due-on-sale clause can impact their financing strategies. If the investor plans to hold the property long-term, the clause may not be a significant concern. However, if the intention is to sell the property quickly or transfer ownership frequently, the clause could limit their options.

Assumable Mortgages

In some cases, the investor may find a property with an assumable mortgage, which allows them to take over the existing loan without triggering the due-on-sale clause. Such opportunities can be advantageous for investors looking to leverage existing financing.

The due-on-sale clause is a critical component of mortgage agreements that both homeowners and property investors should understand. Its presence can affect how real estate transactions are conducted and influence financing decisions. Before buying or selling a property, it is essential to review the mortgage contract and consult with a real estate attorney or financial advisor to fully comprehend the implications of the due-on-sale clause.

This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.


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