Due-On-Sale Clause


DEFINITION of 'Due-On-Sale Clause'

A provision in a mortgage contract that requires the mortgage to be repaid in full upon a sale or conveyance of partial or full interest in the property that secures the mortgage. Mortgages with a due-on-sale clause are not assumable. This clause helps protect lenders against below-market interest rates.

BREAKING DOWN 'Due-On-Sale Clause'

A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage. The holders of a below-market-interest-rate mortgage – or a mortgage-backed security, asset-backed security or collateralized debt obligation backed by a below-market-interest-rate mortgage – generally favor early retirement of that mortgage.

Because of the due-on-sale clause, when you sell your house you cannot transfer your mortgage to the buyer. You must use the sale proceeds to pay off your mortgage, and the buyer must obtain a new mortgage. If it were not for the due-on-sale clause, the mortgage that could be assumed with a home purchase might be part of homebuyers’ purchasing decisions.

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause. The same is true if the owner transfers the property to his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.

  1. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  2. Variable Rate Mortgage

    A type of home loan in which the interest rate is not fixed. ...
  3. Mortgage Application

    A document submitted by one or more individuals applying to borrow ...
  4. Participation Mortgage

    A participation mortgage is a type of mortgage that allows the ...
  5. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
  6. Wrap-Around Loan

    A loan that is most commonly used with property with an outstanding ...
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  2. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  3. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  4. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  5. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  6. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  7. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  8. Home & Auto

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  9. Home & Auto

    4 Alternatives To A Traditional Mortgage

    If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you.
  10. Credit & Loans

    Best 3 Online Auto Loan Calculators that Include Tax

    Learn where you can find the best auto loan calculators online that include sales tax, and understand the different features these calculators offer.
  1. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  2. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  3. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  4. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  5. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  6. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center