A due-on-sale clause is a provision found primarily in residential real estate mortgage contracts. Under most of these clauses, a mortgage lender can demand the outstanding balance on a loan if a homeowner sells a piece of real estate to another person without the lender's written consent. The right to demand payment is generally optional, meaning that the lender is not required to call the loan due. If the outstanding loan cannot be paid, then the lender typically has the right to begin foreclosure proceedings on the property. A due-on-sale clause may also be referred to as an acceleration clause.
In the 1970s, banks and other lending institutions began routinely including due-on-sale contract clauses in mortgage agreements. This is believed to be a result of the high interest rates on many home mortgages during that period of time. Rather than taking out a new loan for a property and receiving a higher interest rate, new homebuyers began assuming loans in order to maintain existing low interest rates. In an effort to exert control over this process, many lenders began including due-on-sale contract clauses.
Today, most banks and lending institutions require each of their mortgage contracts to contain a due-on-sale clause as a matter of course. Their primary rationale is that it gives them the ability to maintain control over the people to whom they lend money. For instance, without a due-on-sale clause, a bank may not be able to prevent a potential homebuyer with poor credit or insufficient income from assuming a mortgage from a seller.
Homebuyers, on the other hand, frequently wish to avoid including due-on-sale clauses in their contracts. One key reason involves interest rates. If a homebuyer secures a top interest rate, for example, he or she may wish to preserve that rate and pass it along to future buyers through an assumption or owner-occupied loan. Additionally, homebuyers who do not have the funds for a large down payment may prefer to assume a mortgage from a seller in order to avoid coming up with a lump sum of cash up front.
As a general rule, a due-on-sale clause covers more transactions than simply a traditional sale of a piece of real estate by one person to another. It is also routinely applicable to contracts for deed, installment land sales contracts, and real property loans by assumption. In some jurisdictions, an exception has been created for the transfer of home ownership from a person to an inter vivos trust. The clause generally does not apply in this circumstance as long as the trust is owned by the original mortgage borrower.
