Key Takeaways:

  • Due-on-sale clauses require full loan repayment upon property transfer.
  • Exceptions exist, including transfers due to death, divorce, or family transfers.
  • The Garn-St. Germain Act of 1982 established many of these exceptions.
  • Assumable mortgages may allow buyers to take over a seller’s loan without triggering a due-on-sale clause.
  • Lenders enforce clauses based on financial conditions, such as rising interest rates.
  • Land trusts and living trusts can be used to transfer ownership without activating the due-on-sale clause.
  • Strategies exist to navigate due-on-sale clauses, but legal consultation is advisable.

Due-on-sale clause exceptions may not pertain to you, but it's important to understand what they are. A due on sale clause stipulates that a mortgage must be paid in full upon the sale of the property. In other words, the lender can demand payment as soon as the property is sold. You may also hear this referred to as an “acceleration clause.”

Due-on-sale clauses protect lenders from interest rates that are below market. Note that this is not a law but rather a contractual right. So, if the property title should ever be transferred, the bank may be able to call the entire loan into payment. 

These clauses are important when someone wants to sell a home without paying off the remaining balance on the loan, as they allow the current lender to call the loan due when the title is transferred. If a lender feels its security is at risk, or if it believes it can make more money, a due-on-sale clause may be enforced. For example, if interest rates are rising, a lender may be interested in enforcing a due-on-sale clause. 

When a due-on-sale clause is enacted, a seller cannot transfer their mortgage directly to the buyer. First, the proceeds from the sale must go toward paying off the mortgage. Then, the buyer will take out another home loan. 

Due-On-Sale Clause Exceptions

A due-on-sale clause may not be easy to find in the midst of all the paperwork. Also, it may be written in as an acceleration clause, but the stipulations will remain the same. While you may have to sift through several pages to find it, nearly every loan created after 1988 contains an acceleration clause. 

There are instances when a lender will not be able to exercise a due-on-sale clause:

  • When a lien does not relate to the transfer of rights of occupancy
  • When a leasehold interest does not contain an option to purchase and it's been three years or fewer
  • When the borrower is deceased, and the property is transferring to a relative
  • When the transfer is taking place between the children or spouse of the borrower
  • When the transfer is occurring as a result of a decree from a separation, divorce, or incidental property settlement agreement

(Note: This list is not exhaustive.) Many of these exceptions can be attributed to the Garn-St. Germain Act of 1982, which put many of these stipulations into motion. For example, a lender would be unable to institute a due-on-sale clause if a piece of property was once owned by two parties and is now owned by a single party. The Garn-St. Germain Act is also responsible for the above exceptions pertaining to children, the death of a borrower, or exemptions pertaining to a living trust. 

Assumable Mortgages and Due-On-Sale Clauses

An assumable mortgage allows a buyer to take over the seller’s existing mortgage under the same terms. This can be beneficial when interest rates have risen significantly since the original loan was secured. However, not all mortgages are assumable, and many conventional loans contain a due-on-sale clause that prevents the buyer from assuming the mortgage without lender approval.

Government-backed loans, such as FHA (Federal Housing Administration) and VA (Veterans Affairs) loans, are among the most commonly assumable mortgages. These loans allow a new borrower to take over the existing mortgage without triggering a due-on-sale clause, provided they meet certain qualifications. The lender may still require a credit check and financial review before approving the assumption.

Lenders may choose to waive a due-on-sale clause for an assumption under specific conditions, such as:

  • The borrower has a strong financial history.
  • The market is weak, and the lender prefers continuity of payments over foreclosure.
  • The buyer is willing to negotiate new terms with the lender.

Living Trusts and Land Trusts

A land trust is one form of a revocable living trust. The Garn-St. Germain Act has exempted these from due-on-sale provisions. Land trusts are created using two legal documents:

  • Trust agreements between the grantors (or creators) of the trust and trustees (or those who define the trust agreement)
  • Deeds between those who created the trust and the trustee

In these instances, a trustee will hold the title. Also, if that title is placed into a land trust, the due-on-sale clause will not be in violation as long as there's no change in occupancy. 

Lenders will notice a real estate transfer in any of these ways:

  • If there's a change of name on the deed
  • If there's a different name on the check received for payment
  • If there's a change in the hazard insurance beneficiary

If a title is transferred into a land trust, the new beneficiary will be appointed trustee. In this instance, the lender isn't likely to object because it will assume the seller has an estate planning device in place. 

However, a lender will not be notified if the beneficiary of the trust is assigned. In this instance, the trustee will be the same. This reduces the chances of the lender uncovering the change. If a lender is using a servicing company, this becomes especially true. 

Risks of Violating a Due-On-Sale Clause

Violating a due-on-sale clause by transferring ownership without informing the lender can have serious consequences. If a lender detects an unauthorized transfer, they may call the loan due immediately. This means the entire remaining mortgage balance must be paid in full, or the lender may initiate foreclosure proceedings.

Common ways lenders identify unauthorized property transfers include:

  • Changes to the deed or title recorded with local property offices.
  • Different names on mortgage payments or bank accounts sending the payments.
  • Updates to insurance policies, such as a new homeowner listed as a policyholder.

While some borrowers attempt to bypass due-on-sale clauses by using land trusts, this method carries risks. If the lender determines that a transfer was made for reasons other than estate planning, they may still enforce the due-on-sale clause.

Strategies for Navigating Due-On-Sale Clauses

Although due-on-sale clauses are enforceable, there are legal strategies to navigate them while avoiding foreclosure:

  1. Seek Lender Approval
    If a lender allows assumptions or modifications, a formal request may enable a transfer without triggering the due-on-sale clause.
  2. Use a Family Transfer Exception
    If the transfer qualifies under the Garn-St. Germain Act (e.g., a spouse or child inherits the property), the lender cannot enforce the clause.
  3. Negotiate with the Lender
    Some lenders may allow mortgage assumptions or refinancing under specific circumstances.
  4. Convert to a Lease with Purchase Option
    Some sellers structure transactions as leases with an option to buy after a set period, allowing a smooth transition without immediate ownership transfer.
  5. Refinance Before the Transfer
    If a property transfer is planned, refinancing under the new owner’s name can avoid triggering the due-on-sale clause.

If navigating a due-on-sale clause, consulting a real estate attorney is highly recommended to ensure compliance with federal and state laws.

Frequently Asked Questions

1. What is the purpose of a due-on-sale clause?

A due-on-sale clause protects lenders from below-market interest rates by requiring loan repayment when a property is sold or transferred.

2. Can a lender always enforce a due-on-sale clause?

Lenders typically enforce these clauses but may waive them under specific circumstances, such as during economic downturns.

3. How can a property be transferred without triggering a due-on-sale clause?

Certain family transfers, estate planning moves, and mortgage assumptions may qualify as exceptions under the Garn-St. Germain Act.

4. What happens if a borrower ignores a due-on-sale clause?

The lender may demand full repayment or initiate foreclosure proceedings if the borrower transfers ownership without approval.

5. Can a borrower legally challenge a due-on-sale clause?

Legal challenges are difficult, but in some cases, lenders may negotiate terms or allow exceptions for family transfers or estate planning.

If you need help with due-on-sale clause exceptions, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.