What Is the Alienation Clause in a Mortgage?

An alienation clause, also known as a due-on-sale clause, is a standard provision found within most mortgage contracts. This clause serves to protect the lender’s financial interests by requiring the borrower to repay the entire outstanding loan balance if the property securing the mortgage is sold or transferred. It essentially prevents a new owner from assuming an existing mortgage without the lender’s explicit consent.

What an Alienation Clause Entails

An alienation clause is a contractual term that grants the mortgage lender the right to demand immediate and full repayment of the loan balance. This right activates if the borrower transfers ownership or any beneficial interest in the mortgaged property without obtaining the lender’s prior approval. The term “alienation” in this context refers to the act of conveying or transferring property, encompassing various methods such as outright sale, gifting, or other means of conveying title. Its inclusion ensures that the original loan agreement concludes when ownership changes, allowing lenders to reassess terms or issue a new loan to a subsequent buyer. The clause helps maintain control over the loan terms and prevents unauthorized property transfers, thereby safeguarding the lender’s investment.

Actions That Trigger the Clause

The alienation clause is typically activated by specific actions taken by the borrower that result in a change of property ownership or beneficial interest. A direct sale of the property to a new owner is the most common trigger, requiring the existing mortgage to be paid off using the sale proceeds. Transferring title through various types of deeds, even without a traditional sale, can also trigger the clause. Certain alternative financing arrangements, such as land contracts or installment sales, where the original borrower retains the mortgage but transfers equitable interest to a buyer, can also activate this provision. The core element that triggers the clause is any unapproved change in who owns or benefits from the property.

Circumstances Where the Clause is Not Enforced

Despite its broad application, there are specific legal exemptions where an alienation clause cannot be enforced, even when a property interest is transferred. The Garn-St. Germain Depository Institutions Act of 1982 is a federal law that restricts lenders from enforcing due-on-sale clauses in certain situations involving residential properties with fewer than five dwelling units. Lenders generally cannot enforce the clause for transfers to a spouse or children of the borrower, or to a relative resulting from the death of a borrower. Transfers into an inter vivos trust are also protected, provided the borrower remains a beneficiary of the trust and there is no change in occupancy rights. Additionally, transfers resulting from a divorce decree, legal separation agreement, or an incidental property settlement agreement, where a spouse becomes an owner, are exempt from enforcement.

Lender Actions Upon Triggering

If an alienation clause is triggered and no statutory exemption applies, the lender is legally entitled to take specific actions. The primary action available to the lender is to accelerate the loan, which means the entire outstanding mortgage balance becomes immediately due and payable. Typically, the lender will issue a formal notice of acceleration, demanding full repayment within a specified timeframe, often around 30 days. If the borrower fails to pay the accelerated balance within this period, the lender has the right to initiate foreclosure proceedings. Foreclosure allows the lender to seize and sell the property to recover the outstanding debt.