A due on sale clause is a provision in a mortgage contract that requires the borrower to repay the remaining loan balance in full if the property is sold or transferred. This clause protects lenders by preventing a new owner from assuming the mortgage under potentially different terms. Common in residential and commercial real estate, a due on sale clause ensures that the original loan agreement ends when ownership changes, allowing lenders to renegotiate terms or issue a new loan to the buyer.
A financial advisor can assist you as you buy or sell a property, helping you update your financial plan to reflect the transaction.
A due on sale clause is triggered when a property owner transfers ownership through a sale, gift or other means without the lender’s consent. Once triggered, the lender has the legal right to demand immediate repayment of the outstanding mortgage balance. This clause is typically included in mortgage contracts to maintain control over the loan terms and prevent unauthorized transfers.
For the clause to take effect, lenders often monitor property title changes through public records. If a transfer is detected, the lender can enforce the provision. However, depending on the loan agreement and applicable laws, some transfers may be exempt from triggering the clause, such as those involving inheritance, divorce settlements or transfers to living trusts.
Borrowers looking to sell or transfer property with an existing mortgage must either pay off the loan or obtain the lender’s approval, which may involve renegotiating the loan terms. Failure to comply with a due on sale clause can result in foreclosure, as the lender retains the right to seize the property if repayment demands are not met.
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Not all mortgages include a due on sale clause, but they are a standard feature in most conventional loans. These clauses are commonly found in fixed-rate and adjustable-rate mortgages, ensuring lenders can maintain control over loan terms if the property changes ownership.
However, certain types of government-backed mortgages do not always include a due on sale clause. These loans often allow assumptions, enabling qualified buyers to take over the existing mortgage. Examples include:
Additionally, private mortgages or seller-financed agreements may not contain a due on sale clause unless explicitly stated. Borrowers should review their loan documents carefully to understand whether this provision applies to their mortgage and how it may impact future property transfers.
