What is 'Alienation Clause'
An alienation clause is a clause in a financial contract that comes into effect when ownership of a specified asset is transferred or a collateral property is sold. Alienation clauses are common in mortgage contracts providing full repayment if real estate property ownership changes. They are also typically included in property insurance contracts as well.
BREAKING DOWN 'Alienation Clause'
An alienation clause is important for mortgage lenders since it ensures that their debt will be fully repaid in the event of ownership transfer or a real estate sale. Alienation clauses are included in both residential and commercial mortgages. They are also included in both residential and commercial property insurance contracts.
Mortgage Alienation Clause Considerations
Mortgage alienation clauses prevent assumable mortgage contracts from occurring. An alienation clause requires the mortgage creditor to be immediately repaid if an owner transfers ownership rights or sells a collateral property. These clauses are included for both residential and commercial mortgage borrowers.
If an alienation clause is not included in a mortgage contract then the owner may be able to transfer the mortgage debt to a new owner in an assumable mortgage contract. Assumable mortgage contracts allow a new owner to take over the previous owner’s remaining debt obligations, making the scheduled payments to the mortgage creditor under the same terms as the previous borrower. Assumable mortgage contracts are not common however they could be used if an owner is in fear of disclosure and does not have an alienation clause in their mortgage contract. An assumable mortgage contract can help a distressed borrower to relieve their debt obligations through a simplified transfer process.
Mortgage lenders structure mortgage contracts with alienation clauses to ensure immediate repayment of debt obligations from a borrower. Nearly all mortgages have an alienation clause. An alienation clause protects the lender from unpaid debt by the original borrower. It ensures that a creditor is repaid in a more timely manner if a borrower has issues with their mortgage payments and is unable to pay. Alienation clauses also protect a lender from third party credit risk which would be associated with a new borrower taking on an assumable mortgage contract since the new borrower has a significantly different credit profile.
Alienation Clauses in Insurance
Residential and commercial property insurance contracts typically also include alienation clauses which release an account holder from paying insurance on a property if the property ownership is transferred or if the property is sold. This release also requires the new homeowner to obtain new insurance in their name for the property in the future.