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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  2. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  3. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  4. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  5. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  6. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
Trading Center