Due-on-Sale Clause

What Is a Due-on-Sale Clause?

A due-on-sale clause is a mortgage contract provision that requires the borrower to repay the lender in full upon the sale or conveyance of a partial or full interest in the property that secures the mortgage. Mortgages with a due-on-sale clause are not assumable by the property's new buyer.

Key Takeaways

  • A due-on-sale clause is a mortgage provision that requires the borrower to repay the lender in full if the property is sold.
  • By contrast, assumable mortgages allow the property's new buyer to take over the existing mortgage.
  • Even when mortgages have a due-on-sale clause, there are occasions when the lender cannot legally invoke it or may voluntarily choose not to.

Due-on-Sale Mortgage vs. Assumable Mortgage

With a due-on-sale clause, homeowners cannot transfer the mortgage to the buyer when selling their property as they could with an assumable mortgage. They must instead use the sale proceeds to pay off the mortgage, and the buyer must obtain a new mortgage on their own.

In that way, a due-on-sale clause helps protect the lender (or owner of the mortgage) from the risk that the mortgage will transfer to the new owner at a time when prevailing interest rates are higher than the rate on that mortgage. The new buyer would instead have to get a new mortgage at current interest rates.

Lenders as well as the holders of pools of mortgages such as mortgage-backed securities, asset-backed securities, or collateralized debt obligations generally favor the early retirement of mortgages with low interest rates.

If a seller attempts to circumvent the due-on-sale clause and transfer the property to a new owner without immediately repaying the mortgage, the lender can foreclose on the property and take possession of it.

Exceptions to the Due-on-Sale Clause Law

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations, even when the ownership of the mortgaged property 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 their 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.

Why Would a Lender Not Invoke a Due-on-Sale Clause?

Even if the lender is legally entitled to invoke a due-on-sale clause, there can be situations in which it may elect not to. For example, in a weak housing market, it might be advantageous for the lender to allow a new buyer to assume the old mortgage rather than risk the possibility that the original borrower will default on it.

Or, if the home has declined significantly in value, and its sale doesn't bring in enough money to cover the debt, the lender might accept less than the full payment in order to recoup at least a portion of what it is owed.