What is a due on sale clause or acceleration clause?
When you take out a mortgage loan to buy a home, you agree to certain terms and conditions set by the lender. One of those terms is the “due-on-sale” clause, which requires the full repayment of the mortgage if the property is sold or transferred to another owner. In this article, we will explain what the due-on-sale clause is and how it affects your mortgage.
What is a Due-on-Sale Clause?
The due-on-sale clause, also known as the acceleration clause, is a provision in most mortgage agreements that allows the lender to demand full payment of the outstanding loan balance if the property is sold or transferred to a new owner. The lender has the right to accelerate the loan and demand immediate payment of the full outstanding balance if the borrower violates the due-on-sale clause.
The due-on-sale clause is intended to protect lenders from the risk of losing their security interest in a property. Lenders rely on the income from mortgage payments to help offset the risk of lending money. If the property is sold or transferred, the lender could lose the income from mortgage payments and may have difficulty recovering the remaining balance of the loan.
How Does the Due-on-Sale Clause Impact Borrowers?
The due-on-sale clause can create challenges for homeowners who want to sell their property or transfer it to another owner. If you attempt to sell or transfer the property with an existing mortgage, the lender will require the outstanding loan balance to be paid in full before the transfer can take place. If you cannot pay off the balance, the transfer may not be possible.
The due-on-sale clause may also impact homeowners who want to transfer the property to a family member or spouse. While many family transfers are exempt from the clause, it’s important to review your mortgage agreement to understand your specific circumstances.
Are There Any Exceptions to the Due-on-Sale Clause?
While due-on-sale clauses are standard in most mortgage agreements, there are a few exceptions to the rule. The Garn-St. Germain Depository Institutions Act of 1982 allows certain transfers to be exempt from the due-on-sale clause, including:
- Transfers between spouses
- Transfers from a parent to a child
- Transfers to a living trust in which the borrower and beneficiary are the same
- Transfers after the borrower’s death
Other exceptions may be available depending on your state’s laws and regulations.
In some cases, lenders may also agree to waive the due-on-sale clause for specific circumstances, such as a transfer due to divorce or a financial hardship. It’s important to discuss your options with your lender and a real estate attorney to understand your options.
Conclusion:
The due-on-sale clause is a provision in most mortgage agreements that requires the full repayment of the outstanding loan balance if the property is sold or transferred to another owner. While the clause may present challenges for homeowners who want to sell or transfer their property, there are exceptions and alternative options available in certain circumstances. It’s important to review your mortgage agreement and consult with a real estate attorney to understand your options.
If you are involved in a real estate transaction, it is also important to consult with an attorney who specializes in real estate law to ensure that your rights and interests are protected. At AllenYLaw we have years of experience in dealing with real estate transactions and have seen it all. Contact Allen Yusufov today at (732) 874-1479 or allen@allenylaw.comfor expert representation backed by years and thousands of transactions worth of experience.