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When engaging in a real estate transaction, it’s important to understand the details of your mortgage agreement – especially clauses that dictate how ownership can be transferred. One such provision is the alienation clause, which prevents a borrower from transferring ownership of a property without first paying off the mortgage. For homebuyers, real estate investors and sellers, knowing how an alienation clause works can help avoid unexpected complications when selling or refinancing a property.
If you’re planning to buy, sell or transfer property ownership, it can be a good idea to work with a financial advisor.
An alienation clause – also referred to as a due-on-sale clause – requires the borrower to pay off the remaining mortgage balance before transferring ownership. It applies primarily to conventional mortgages and not government-backed loans like FHA or VA loans, which allow loan assumptions under certain conditions.
The alienation clause requires new buyers to secure their own financing, allowing the lender to evaluate their creditworthiness and set appropriate mortgage rates. Without this clause, a buyer could take over a loan at a lower interest rate, potentially leading to losses for the lender and exposing them to additional risk. However, a few exceptions do exist for borrowers, the most common being transfer of ownership as part of an inheritance due to death or illness.
While an alienation clause is triggered by the sale or transfer of property, an acceleration clause is activated when the borrower violates loan terms – such as failing to make payments. If an acceleration clause is enforced, the lender can demand immediate repayment of the outstanding loan balance, even if the borrower has not transferred ownership. Both clauses allow lenders to mitigate financial risks by requiring full loan repayment under specific circumstances.
Alienation clauses are common in fixed-rate and adjustable-rate mortgages, wherelenders maintain control over loan repayment and refinancing. Here’s how the clause typically functions:
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A homeowner decides to sell. When a homeowner lists their property for sale, they must consider the mortgage terms, including the alienation clause.
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A buyer purchases the property. If the home sells, the seller must use the sale proceeds to pay off their remaining mortgage balance before transferring ownership to the buyer.
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Lender enforces the clause. If the seller attempts to transfer the property without paying off the mortgage, the lender has the right to demand immediate repayment of the loan balance.
