The Due-On-Sale Clause, also known as an acceleration clause, is a provision in a mortgage contract that requires the borrower to repay the remaining balance on the loan if the property is sold or transferred. This clause is typically included to protect the lender’s interests by ensuring that the loan is satisfied when the collateral (property) changes ownership.
Definition and Function
A Due-On-Sale Clause stipulates that the mortgage loan becomes immediately due and payable when the borrower transfers ownership of the property. This provision helps lenders manage the risk of having the property transferred to someone with lower creditworthiness than the original borrower.
Example Scenario
Consider a homeowner who sells their house but does not pay off the mortgage. If the mortgage includes a Due-On-Sale Clause, the lender can demand full repayment of the outstanding loan balance once the sale has been finalized.
Waiving the Due-On-Sale Clause
Mortgage lenders sometimes waive the Due-On-Sale Clause under certain conditions:
- Interest Rate Adjustment: The lender may require an increased interest rate to compensate for the risk associated with the new borrower.
- Qualifying New Owner: The lender may assess the creditworthiness of the new owner and allow the assumption of the mortgage if they meet certain criteria.
Historical Context
The Due-On-Sale Clause became a common feature in mortgage contracts in the United States during the 1970s and 1980s. Lenders introduced it to protect themselves against rising interest rates at a time when inflation was increasing rapidly. This clause ensures that lenders can adjust the terms of the loan or accelerate repayment if the property is transferred.
Applicability and Exceptions
In some jurisdictions, state-chartered lenders may face restrictions on enforcing the Due-On-Sale Clause. It’s essential for borrowers and lenders to be aware of local laws and regulations governing this provision.
Assumption of Mortgage
An assumption of mortgage occurs when a new buyer takes over the existing mortgage rather than securing a new loan. For this process to be feasible without triggering the Due-On-Sale Clause, the new owner typically needs to qualify under the lender’s standards.
Legal Considerations
Borrowers should be aware of their mortgage contract terms and any potential legal consequences of transferring ownership without satisfying the Due-On-Sale Clause.
Related Terms
- Interest Rate: The percentage of the loan amount that a lender charges as interest to the borrower.
- Mortgage: A loan secured by property, typically real estate, that obliges the borrower to make predetermined payments.
- Acceleration Clause: A contract term that allows the lender to demand full repayment of the outstanding loan under specific conditions.
- Subordination Clause: A clause allowing subsequent liens or mortgages to take a higher priority than the first mortgage.
FAQs
Q: Can a lender enforce a Due-On-Sale Clause if the borrower transfers the property to a family member? A: Yes, unless the lender agrees to waive the clause or the transfer meets specific exceptions under relevant state laws.
Q: Will refinancing the property trigger the Due-On-Sale Clause? A: Refinancing involves obtaining a new mortgage, which typically requires the original loan to be paid off, thereby addressing the clause.
References
- Federal National Mortgage Association (Fannie Mae) Guidelines
- Mortgage Bankers Association Publications
- U.S. Department of Housing and Urban Development (HUD) Guidelines
Summary
The Due-On-Sale Clause is a critical component of mortgage contracts that enables lenders to safeguard their interests by requiring loan repayment upon property transfer. Its implications, waivers, and exceptions significantly impact real estate transactions and mortgage assumptions. Understanding this provision helps both borrowers and lenders navigate the complexities of mortgage agreements effectively.
