What is a “due on sale” clause in a mortgage contract? This common phrase, found in most conventional home loan paperwork, means that when a property is sold, the entire balance of the loan comes due. Yup, you have to pay off the whole thing!
What is a ‘due on sale’ clause?
“Due on sale” clauses are a type of acceleration clause. Acceleration clauses protect lenders by allowing them to accelerate, or call, a loan if a borrower takes certain actions. Accelerating a mortgage is usually a bad thing: In most contexts, it means that a borrower has missed payments or violated the terms of the contract, and the lender is demanding that the full amount of the loan be paid immediately or be subject to foreclosure.
“Due on sale” acceleration, however, is a normal part of selling a home. Typically, homeowners will use the proceeds of the sale of their home to pay off their loan in full, then take out a new loan when they’re ready to purchase another property. (Meanwhile the buyers of the home will get their own home loan separately.)
Why do ‘due on sale’ clauses exist?
“Due on sale” clauses essentially are put in place to prevent homeowners from transferring their mortgage to the next buyer along with the house—or, in turn, taking their loan with them to the next house. Mortgages are typically tied to particular properties and individuals—and lenders prefer to vet both thoroughly.
As such, most standard mortgages contain a “due on sale” clause to make sure everybody gets their own loan.
Do home loans without a ‘due on sale’ clause exist?
There are some kinds of mortgages where the contract does not have a “due on sale” clause. Those include VA, USDA, and FHA loans.
These types of mortgages lack such clauses because they actually can be transferred from one individual to another. This is also known as an “assumable” mortgage, meaning a buyer can take over the seller’s existing loan.
Why would someone want to transfer a loan—or take over one?
When interest rates are high, transferring a mortgage might allow the buyer to access the seller’s older, better interest rate. But with today’s historically low-interest rates, transferring a loan is probably more trouble than it’s worth for most buyers.
Yet although VA, USDA, and FHA loans are assumable, that doesn’t mean any buyer can just take over the loan—the lender still requires the new buyer to meet certain qualifications. It’s also worth noting that mortgages can typically be transferred in the wake of unexpected life events such as death and divorce.
For the legal nitty-gritty, check out the Garn–St. Germain Act of 1982. The main exceptions include transferring a loan to a relative if a borrower dies, transferring a loan between ex-spouses after a divorce, transferring a loan between a borrower and the spouse or children, and transferring a loan to a living trust.
Here’s more on how to transfer a mortgage and when it’s possible to do so. As for the rest of you, just know that a “due on sale” clause means you’ll have to pay the piper (meaning your lender) when you sell.