How Often Is a Due-on-Sale Clause Called?

Mortgages are fundamental to real estate ownership for many individuals, allowing them to finance the significant cost of purchasing a home. Within these mortgage agreements, a common provision known as a “due-on-sale” clause exists, which can impact property transfers. This article will explore the nature of this clause and how its enforcement plays out in the real world.

Understanding the Due-on-Sale Clause

A due-on-sale clause in most mortgage contracts grants the lender the right to demand immediate repayment of the entire outstanding loan balance if the mortgaged property is sold or transferred. It is also called an “alienation clause” or an “acceleration clause” because it accelerates the loan’s repayment. Its primary purpose is to protect the lender’s financial interest.

Lenders use this clause to prevent a new buyer from assuming a low-interest mortgage, especially when market interest rates have risen, allowing them to re-lend money at current, potentially higher, rates. It also allows lenders to assess the creditworthiness of any new owner, as the original loan was approved based on the borrower’s financial profile. Without such a clause, a property could be sold and the existing mortgage assumed by a new party without the lender’s consent or review.

Events That Trigger the Clause

Various scenarios can activate a due-on-sale clause, giving the lender the option to call the loan due. The most straightforward trigger is an outright sale of the property to a new owner, where the title changes hands. This includes typical home sales where the seller pays off the existing mortgage.

Triggers can extend beyond a traditional sale. Transferring the property title to another individual (even a family member), or to an entity like a limited liability company (LLC) or certain types of trusts, can also activate the clause. Gifting the property to someone else, or even leasing it for an extended period, can also be considered a transfer that could trigger the clause.

Legal Protections Against Enforcement

While due-on-sale clauses are widespread, federal law limits their enforceability in certain situations. The Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. 1701j-3) provides exceptions where a lender cannot enforce the clause, particularly for residential real property with fewer than five dwelling units. This act prevents lenders from demanding full repayment for common property transfers.

For instance, a lender cannot enforce the clause if the property is transferred by devise, descent, or operation of law upon the death of a joint tenant or tenant by the entirety. Transfers to a relative resulting from the death of the borrower are protected, allowing heirs to assume the mortgage under the original terms. The act also shields transfers to a spouse or children of the borrower, whether during their lifetime or as part of a divorce settlement. Transferring the property into an inter vivos trust (living trust) generally does not trigger the clause, provided the borrower remains a beneficiary and occupant.

Real-World Enforcement Frequency

Despite their inclusion in most mortgage contracts, due-on-sale clauses are rarely enforced by lenders, especially for residential mortgages with consistent payments. Lenders primarily seek consistent loan payments rather than engaging in the complex, costly process of demanding immediate repayment or foreclosure. The administrative and legal burdens of enforcing the clause, including potential legal fees, often outweigh the benefits unless specific circumstances warrant it.

The legal protections of the Garn-St. Germain Act also significantly reduce instances where lenders can enforce the clause. Market conditions play a role; if interest rates have fallen since the original loan was issued, a lender has little incentive to call the loan, as they would offer a new loan at a lower rate. Conversely, if rates have risen, a lender might consider enforcement to originate a new loan at a higher rate, but they still prioritize a performing loan over the costs and risks of accelerating it. Ultimately, lenders usually only consider enforcing a due-on-sale clause if the new owner defaults on payments or if the transfer significantly increases the perceived risk to their investment.