What is a Due on Sale Clause?

Due on sale is a mortgage contract clause that requires the full loan balance to be paid when the property is sold.

A Longer Definition: Due on Sale Clause

The due on sale clause, also known as an acceleration clause, is a common provision in mortgage agreements, especially in conventional mortgages backed by Fannie Mae or Freddie Mac, and jumbo mortgages from private banks.

Due on sale stipulates that when a property securing the mortgage is sold or transferred, its remaining principal balance becomes immediately due and payable. Without this clause, a homeowner could sell the property and use the proceeds for something other than paying the mortgage and releasing the lien.

The due on sale clause is also relevant when a homeowner is underwater, selling the home, and the sale price is lower than the loan balance. Because of the due on sale clause, the underwater homeowner must bring extra cash to closing to satisfy the lien or ask the lender for permission to complete a short sale.

The due on sale clause is the opposite of the assumption clause, which allows homeowners to transfer their mortgage to the subsequent owner of the home.

Due on Sale Clause: A Real World Example

Imagine a first-time home buyer using the HomeReady 30-year fixed-rate mortgage, which allows for a 3 percent downpayment. Because HomeReady is a conventional mortgage, it includes the standard due on sale clause, which requires the remaining balance on the loan to be paid immediately when the home is sold.

After living in the home for four years, the first-time buyer sells it, triggering the mortgage’s due on sale clause. Because the sale price is higher than the loan balance, the buyer pays off the mortgage and keeps the difference, which is used as a downpayment for the next home.

If the sale price had been lower than the loan balance, the buyer would have had to bring the cash difference to closing to pay off the mortgage or ask the lender to approve a short sale instead.

Common Questions About Due on Sale

What happens if I sell my home and my mortgage has a due on sale clause?

If your mortgage has a due on sale clause and you sell your home, the sale proceeds must be used to pay off the remaining mortgage balance.

Does a due on sale clause affect refinancing?

The due on sale clause does not typically impact refinancing. Refinancing means paying off the current mortgage with a new one, which is a separate process from selling the home.

What if I inherit a property with a mortgage?

Inheriting a property with a mortgage can be complex. The due on sale clause might apply, but exceptions exist, particularly for inherited properties. Contact the mortgage servicer to understand your options and responsibilities.

Can an assumption clause override a due on sale clause?

No, an assumption clause cannot override a due on sale clause. If the mortgage includes a due on sale clause, the loan must be paid off upon selling, preventing the new buyer from assuming the mortgage.

How common is a due on sale clause in mortgages?

The due on sale clause is very common in mortgages, particularly in conventional home loans, as it protects lenders from risks associated with loan assumptions.

What are my options if I can’t pay off the mortgage after selling?

If you cannot pay off the mortgage after selling, you might negotiate a short sale with your lender or explore other financial options to cover the shortfall.

Does a due on sale clause apply to family transfers?

In some cases, family transfers can trigger a due on sale clause. However, there may be exceptions or special considerations. Review the specific mortgage terms and contact the mortgage servicer to understand your options.