Once you sell or transfer your property, you must repay your existing mortgage loan.
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The due-on-sale clause is a type of acceleration clause that forces the borrower to repay the mortgage at once
Homeowners trigger the due-on-sale clause when they sell or transfer their mortgaged property
Not all types of mortgages have a due-on-sale clause
Under law, due-on-sale clauses are not enforceable for certain transfers of ownership, like to a spouse or a trust
If you want to sell your home, maybe you’ve wondered why the buyer can’t just take over your existing mortgage loan. This is because of a due-on-sale clause, which prevents a mortgage from transferring from one homeowner to the next. A due-on-sale clause is a provision in a mortgage contract that requires the borrower or homeowner to repay the entire mortgage balance if the house is sold or transferred. However, there are certain exceptions when you can transfer ownership without consequence, like if you deed the property to your spouse.
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Many mortgage loan agreements have an acceleration clause, which says you must repay your mortgage balance if you violate the terms of the contract. For example, the lender, like a bank or credit union, might have the right to invoke the acceleration clause if you miss three mortgage payments or if you fail to pay private mortgage insurance. That means the lender can require you to repay the rest of your mortgage or “accelerate” the payment.
If you have a mortgage, the due-on-sale clause is triggered when you sell the property or transfer ownership of it, usually through a deed.
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Almost all conventional loans have a due-on-sale clause, which is not necessarily a negative feature. When people sell their homes, they use the proceeds to repay their existing loan, and then restart the home buying process by taking out a brand new mortgage. The new buyer will also have to take out their own mortgage — the existing loan can’t be transferred or “assumed” by the new owner.
The reasoning behind the due-on-sale clause is to prevent the new buyer from automatically receiving the benefit — like low interest rates or lenient loan terms — of the previous homeowner’s mortgage contract. For example, a buyer who wouldn’t qualify for a mortgage on their own because of low credit score wants to take over the current existing loan with a low interest rate. Or maybe mortgage rates have skyrocketed, and a buyer wants to assume a property’s existing mortgage, which had a lower interest rate when it was taken out 15 years ago. Due-on-sale clauses prevent these scenarios from happening. Without a due-on-sale clause, homes and their accompanying mortgages would simply transfer between homeowners and buyers.
Mortgage rates have been historically low, so if you’re looking to buy a home or invest in real estate you might be able to get a favorable interest rate — you can see weekly mortgage rates here.
If you try to transfer ownership of your home to someone — for example by using a quitclaim deed — the bank has the right to seek payment for the loan balance. But they may not do so immediately. As long as you or the new owner keeps making payments, the bank may choose not to exercise its right to call in the remaining loan. If, however, they do, then you must make the necessary payments, and if you don’t the bank may foreclose on the house. The bank will seize the house, and you will have to leave and may even be evicted.
There are some types of mortgage loans that do not have a due-on-sale clause. Government-backed loans, like FHA loans, VA loans, and USDA loans, are notable exceptions. These are all assumable mortgages. Assumable conventional mortgages, which aren’t backed by the federal government, rarely exist anymore.
A due-on-sale clause is not enforceable in certain situations, thanks to the Garn-St. Germain Depository Institutions Act. According to this law, transfer of ownership from a spouse to a child, spouse, ex-spouse, or a living trust with a named beneficiary will not trigger the due-on-sale clause. The bank will allow these parties to assume ownership of the mortgage loan.
This is important for people who want to fund a trust as part of their estate plan with any real estate property that might have a mortgage. Transferring the property into the trust won’t affect the mortgage — you’ll continue making mortgage payments.
Learn more about estate planning.
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