What is a due-on-sale clause?

For much of America’s existence, it was common for home buyers to assume mortgages from the home’s previous owner. In 1982, however, Congress passed the Garn-St. Germain Depository Institutions Act, which made due-on-sale clauses federally enforceable. Suddenly, there was a new standard in home buying.

Today, nearly every mortgage contains a due-on-sale clause, entitling the existing lender to call the loan due and payable if the homeowner wishes to sell the home. If your mortgage is assumable, that means it's transferrable and not due on sale.

The due-on-sale clause is different from an acceleration clause, which triggers when you miss mortgage payments, file for bankruptcy, or fail to fulfill other loan requirements.

How does a due-on-sale clause work?

A due-on-sale clause is a mortgage contract provision enabling a lender to demand the borrower repay the remaining mortgage balance in full if the property is sold or transferred. 

In most real estate transactions, a buyer obtains a new mortgage to pay the seller for the house, and the seller uses these proceeds to pay off the remaining balance of their mortgage, taking any excess amount as profit. This essentially forces the seller to pay off their debt before formally transferring the title of the home.

When the loan terms include a due-on-sale clause, the mortgage is not assumable by the home’s buyer. The transaction plays out this way to ensure that a buyer gets a new mortgage at a more current interest rate, with current terms, and a seller can’t sell a home without the bank’s consent.

Do all loans include a due-on-sale clause?

There are, however, some exceptions to due-on-sale clauses, including transfers to trusts, children, or spouses. Not all types of mortgages include a due-on-sale provision either; government-backed loans, like FHA loans and VA loans can be transferred to someone else.

→ Find out what happens to a mortgage when someone dies

When does the due-on-sale clause apply?

Mortgages are a type of encumbrance or lien, which means that lenders get automatically notified when a property title is transferred. This triggers the due-on-sale clause, allowing the lender to demand immediate repayment of the remaining mortgage balance. (Basically, you can’t sneak a sale past the lender.)

Ultimately, it’s a lender’s decision if and when to invoke the due-on-sale clause. If you’re compliant with paying your loan and sold your property in a traditional, legal way, you won’t really need to worry about the clause. 

4 reasons a lender invokes a due-on-sale clause

• You try to sell someone a property that you don’t own outright.
• The lender finds out that you attempted to transfer property to a new buyer without approval.
• The lender fears an unvetted buyer would put the loan at risk.
• The lender believes they can make more money if the new buyer were to apply for a new mortgage.

When would a lender not enforce a due-on-sale clause?

In some rare instances, a lender may prefer not to invoke the due-on-sale clause even after a home sale. This occasionally happens in weak housing markets, when it’s more advantageous for a buyer to assume the old mortgage rather than risk the original borrower defaulting on the loan. Likewise, if a home has significantly declined in value, the sale may not bring in enough money to cover the debt. In these cases, the lender might prefer to set up a payment plan with the borrower to recoup what it’s owed plus interest over a longer period of time.

4 exceptions to the due-on-sale clause

While lenders may sometimes choose not to invoke the due-on-sale clause, there are also several legal exceptions that negate a lender’s right to demand the full mortgage payment.

You’re transferring the property during divorce

Homeowners can transfer property to a spouse or child of a marriage if they file for divorce or legal separation, usually without having to repay the entire mortgage as a result. The new owner of the house, like your ex-spouse for example, must occupy the property as their residence to ensure the lender doesn’t trigger the due-on-sale clause.

→ Learn more about selling the house during divorce

You receive the property as an inheritance

Mortgage lenders cannot demand that beneficiaries repay the remaining mortgage balance on inherited property if they plan to live in it. However if you don’t plan to live there, mortgage assumption might be ruled out and you may have to repay the loan. Speak to a loan officer to find out more.

→ Learn about selling inherited property

You’re moving the property into a living trust

When you put your home in a trust, you retitle the property so the trust becomes the owner.  This is a common estate planning strategy that can make for a more seamless transfer of assets after your death, and the mortgage lender doesn't usually call for the mortgage to repaid at this time. You can speak to an estate lawyer if you're interested in opening a living (inter vivos) trust. 

→ Learn more about putting your house in a trust

You own the home jointly with someone else

Many borrowers enter joint tenancy agreements with spouses or partners when buying a home When one of the party dies the surviving owner, the joint tenant, automatically assumes the mortgage and the lender won’t trigger the due-on-sale clause.

Once upon a time, home buyers could simply assume an existing mortgage when buying a new home. Today, that’s very rarely the case as lenders maintain the right to invoke the due-on-sale clause in nearly all home transactions. While it shouldn’t change how you think about buying or selling a home, it’s good to know how due-on-sale clauses work and when they’re legally unenforceable.