Due-on-Sale Clause: Definition, How It Works, Example, Exceptions

In the transactionary domain of real estate transactions, the Due-on-Sale Clause plays a significant role in mortgage agreements. This clause, also known as an acceleration clause, gives lenders the right to demand full repayment of a loan when the property securing the loan is sold or transferred. In this blog, we will explore the meaning of the Due-on-Sale Clause, how it operates, provide an example for clarity, outline exceptions to the clause, and address some commonly asked questions about this provision.

What is a Due-on-Sale Clause?

A Due-on-Sale Clause is a contractual provision commonly found in mortgage agreements that allows the lender to accelerate the repayment of the loan if the property securing the loan is sold or transferred to a new owner. Essentially, this clause gives the lender the authority to demand full repayment of the outstanding loan balance upon the occurrence of a sale or transfer of ownership.

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How Does the Due-on-Sale Clause Work?

When a property owner sells or transfers ownership of a property with an existing mortgage containing a Due-on-Sale Clause, the lender has the option to invoke the clause. This means that the lender can require the borrower to repay the remaining loan balance in full, typically within a specified timeframe, following the sale or transfer of the property.

By enforcing the Due-on-Sale Clause, lenders aim to protect their financial interests by ensuring that the terms of the original mortgage agreement are upheld. This clause helps prevent situations where a new owner assumes an existing mortgage without the lender’s consent, potentially exposing the lender to increased risk.

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Example of Due-on-Sale Clause

For instance, if a homeowner decides to sell their property that has an outstanding mortgage with a Due-on-Sale Clause, the lender may choose to exercise the clause upon learning about the sale. In this scenario, the lender can demand that the borrower repay the remaining loan amount in full, even if the loan was previously assumed by the new property owner.

This example illustrates how the Due-on-Sale Clause allows lenders to protect their financial interests and maintain control over the terms of the mortgage agreement when a property changes ownership.

Exceptions to the Due-on-Sale Clause

While the Due-on-Sale Clause is a standard provision in most mortgage agreements, there are certain exceptions where lenders may not enforce the clause. Common exceptions include transfers due to inheritance or divorce, transfers to a spouse or relative, transfers to a trust where the borrower retains control, and transfers resulting from a corporate reorganisation or restructuring.

These exceptions provide some flexibility for borrowers in specific circumstances where the transfer of property ownership does not pose a significant risk to the lender’s interests.

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FAQs

1. What is the purpose of a Due-on-Sale Clause?

The primary purpose of a Due-on-Sale Clause is to protect the lender’s financial interests by allowing them to accelerate the repayment of a loan when the property securing the loan is sold or transferred. This clause helps maintain the lender’s control over the terms of the mortgage agreement and prevent potential risks associated with changes in property ownership.

2. Can a borrower negotiate to remove a Due-on-Sale Clause from a mortgage agreement?

Due-on-Sale Clauses are typically non-negotiable terms in mortgage agreements. Lenders include these clauses to safeguard their interests, and borrowers are generally unable to remove or alter this provision once the mortgage is in place.

3. What happens if a borrower violates the Due-on-Sale Clause?

If a borrower violates the Due-on-Sale Clause by selling or transferring the property without notifying the lender or obtaining consent, the lender has the right to demand full repayment of the outstanding loan balance. Failure to comply with this demand could result in legal action or foreclosure proceedings initiated by the lender.

4. Is Due-on-Sale Clause insurance available to protect against its enforcement?

Due-on-Sale Clause insurance, also known as a title insurance endorsement, may be available to provide coverage in case the lender enforces the Due-on-Sale Clause following a property transfer. This type of insurance can offer protection to borrowers against unexpected financial liabilities resulting from the acceleration of the loan repayment.

5. Can a lender waive the Due-on-Sale Clause under certain circumstances?

Lenders have the discretion to waive the enforcement of the Due-on-Sale Clause under specific circumstances, such as loan assumptions with lender approval, transfers between family members, or transfers resulting from legal proceedings like divorce or inheritance. Lenders may choose to grant exceptions to the clause based on individual circumstances and their assessment of associated risks.

In conclusion, the Due-on-Sale Clause serves as a protective measure for lenders in mortgage agreements, allowing them to safeguard their financial interests when a property changes ownership. Understanding the implications, applications, exceptions, and considerations related to this clause is essential for borrowers and property owners involved in real estate transactions.