May 28th, 2018 9:19 AM by Jackie A. Graves, President
is a "due on sale" clause in a mortgage contract? This common phrase,
found in most conventional home loan paperwork, means that when a property is
sold, the entire balance of the loan comes due. Yup, you have to pay off the
sale" clauses are a type of acceleration clause. Acceleration clauses
protect lenders by allowing them to accelerate, or call, a loan if a borrower
takes certain actions.
a mortgage is usually a bad thing: In most
contexts, it means that a borrower has missed payments or violated the terms of
the contract, and the lender is demanding that the full amount of the loan be
paid immediately or be subject to foreclosure.
on sale" acceleration, however, is a normal part of selling a home.
Typically, homeowners will use the proceeds of the sale of their home to pay
off their loan in full, then take out a new loan when they're ready to purchase
another property. (Meanwhile the buyers of the home will get their own home
Why do 'due on sale' clauses exist?
on sale" clauses essentially are put in place to prevent homeowners
from transferring their mortgage to the next buyer along with the
house—or, in turn, taking their loan with them to the next house. Mortgages are
typically tied to particular properties and individuals—and
lenders prefer to vet both thoroughly.
such, most standard mortgages contain a "due on sale" clause to make
sure everybody gets their own loan.
There are some
kinds of mortgages where the contract does not have a "due on sale"
clause. Those include VA, USDA, and FHA loans.
of mortgages lack such clauses because they actually can be transferred
from one individual to another. This is also known as an "assumable" mortgage,
meaning a buyer can take over the seller's existing loan.
someone want to transfer a loan—or take over one?
rates are high, transferring a mortgage might allow the buyer to access the
seller's older, better interest rate. But with today's historically low
interest rates, transferring a loan is probably more trouble than it's worth
for most buyers.
VA, USDA, and FHA loans are assumable, that doesn't mean any
buyer can just take over the loan—the lender still requires the new buyer to
meet certain qualifications. It's also worth noting that mortgages can
typically be transferred in the wake of unexpected life events such as death
For the legal
nitty-gritty, check out the Garn–St. Germain Act of 1982. The main exceptions
include transferring a loan to a relative if a borrower dies, transferring a
loan between ex-spouses after a divorce, transferring a loan between a borrower
and the spouse or children, and transferring a loan to a living trust.
on how to transfer a mortgage and
when it's possible to do so. As for the rest of you, just know that a "due
on sale" clause means you'll have to pay the piper (meaning your lender)
when you sell.
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