Due on Sale Clause
A provision in a mortgage contract that requires the borrower to pay off the entire loan balance immediately when the property is sold or transferred to another party. This clause prevents buyers from assuming the seller's existing mortgage without the lender's approval.
Example
“The homeowner couldn't simply transfer the mortgage to the buyer because the loan contained a due on sale clause requiring full repayment upon transfer of ownership.”
Memory Tip
Remember 'Sale = Sudden Payment' - when you sell, the bank suddenly wants all their money back immediately.
Why It Matters
This clause protects lenders from having loans transferred to buyers who may not qualify for the original loan terms and ensures lenders can adjust interest rates to current market conditions. Violating this clause can result in the lender demanding immediate full payment of the loan.
Common Misconception
Some people believe they can easily transfer property ownership while keeping the original mortgage in place, but the due on sale clause typically makes this impossible without lender consent.
In Practice
When a homeowner tries to sell their property using owner financing or deed transfer while keeping their original mortgage, the lender can invoke the due on sale clause and demand immediate payment of the remaining loan balance. Most conventional mortgages include this clause, making loan assumptions rare without formal lender approval.
Etymology
From legal Latin 'clausula' meaning 'a closing' and the concept that full payment becomes 'due' immediately 'on' the event of a 'sale.'
Common Misspellings
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