Due-On-Sale Clause: Everything You Need to Know
A due-on-sale clause embodies the arrangement in a mortgage contract where the mortgage must be completely reimbursed at the time of sale. 3 min read
A due-on-sale clause, otherwise known as an alienation or acceleration clause, embodies the arrangement in a mortgage contract where the mortgage must be completely reimbursed at the time of sale. A due-on-sale clause can either transfer a partial or total interest in the property, which will make the mortgage safe. With this clause, lenders are protected from below-market interest rates.
What Is a Due-on-Sale Clause?
With the due-on-sale or acceleration clause, the lender has the right to request payment for the outstanding amount of the loan when the property is sold. This falls under the contractual right and does not fall into the category of law. If the property title is transferred, depending on the bank's decision, the lender can demand the loan to be repaid at any time or call the loan due.
With a due-on-sale clause, it is possible for a homeowner to sell the home even if the loan is not entirely paid off. It permits the existing lender to call the total loan due if the homeowner changes the ownership of a home without having to pay off the entire loan.
- If the lender feels that mortgage safety is threatened or is convinced that more money could be achieved if interest rates are increased, then the due-on-sale clause is implemented.
- A bank can exploit the money from the payment of existing loans with the lower market interest rate for the purpose of financing a new loan at a higher rate.
- It is in the bank's best interest to call that loan due and payable in full. This could create a challenge for borrowers who have to refinance the loan.
After the house is sold, the mortgage cannot be transmitted to the buyer by the homeowner if that account has a due-on-sale clause in its contract. In these circumstances, funds from the sale are used to pay off the mortgage, and the buyer should proceed with acquiring a new mortgage. Without the due-on-sale clause, the mortgage that is expected to be part of a home purchase could be the factor of the homebuyers' purchasing decision.
- A mortgage with no due-on-sale provision protects an assumable loan. Mortgages that are created before December 1989 are FHA-insured. Loans that started before February 1988, which are VA-guaranteed, are without specific provisions.
- If an entire or a fragment of the property is shifted in ownership and has nonexistent lender's agreement in writing, the lender may instantly insist on the total amount due and payable in full.
- Whenever entire or a portion of the estate is sold or transferred without lender's approval in writing, the lender has the right to demand a full payment fixed by the Security Instrument.
One of the underlying mortgage lenders' rights is a due-on-sale clause in mortgage contracts. All loans created after 1988 include the due-on-sale clause, noted as an acceleration clause.
A due-on-sale clause is essential because the lender has the right to claim a payoff. Even if the title of a property is reassigned, it doesn't mean that the lenders are not often calling loans due and payable.
- A common misconception is that it is illegal to convert a title of an estate, which is protected by a due-on-sale mortgage.
- Also, people often confuse civil liability with criminal liability. Breaking any criminal law, code of conduct, or statue is against the law. Whereas, no federal or state law is dictating that violation of a due-on-sale clause is an offense against the law.
- Depending on a lender's personal choice, it may call the loan due and payable after finding out about the transfer.
- On the other hand, the lender has a solution to pay off the loan, which gives him the right to start foreclosure proceedings.
A good example is a situation in which a quitclaim deed is used or if selling a home without the previous lenders written approval in order to transfer one's estate. The bank has the right to put the due-on-sale clause and proceed with foreclosing toward one's assets, and therefore the borrower is obligated to compensate for the full loan. Although the mortgage payments are ongoing, banks could use the due-on-sale clause and begin with foreclosure reports.
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