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 conventional mortgages backed by Fannie Mae or Freddie Mac, and jumbo mortgages from private banks.

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

The due on sale clause also comes into play when a homeowner is underwater, selling their home, and the home sale price is below the balance on the loan. Because of the due on sale clause, the underwater homeowners must bring extra cash to closing to satisfy their lien or ask their lender for permission to do 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 their home.

Due on Sale Clause: A Real World Example

First-Time Home Buyer Stories: Due on Sale Clause

Imagine a first-time home buyer buying a home and using the HomeReady 30-year fixed-rate mortgage, which allows for a 3 percent downpayment. Because HomeReady is a conventional mortgage, it contains the standard due on sale clause, which states that when the home is sold, the buyer must pay the remaining balance on the loan immediately.

After living in their home for four years, the first-time home buyer sells it, triggering the mortgage’s due on sale clause.Because the sale price is larger than the loan balance, the buyer pays off the mortgage and gets to keep the difference, which they use as a downpayment for their next home.

Had the sale price been less than the loan balance, the buyer would have brought the cash difference to closing to satisfy the mortgage or asked their 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 you have a mortgage with a due on sale clause and sell your home, you must use the sale proceeds 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 your current mortgage with a new one, a separate process from selling your home.

What if I inherit a property with a mortgage?

Inheriting a property with a mortgage can be tricky. The due on sale clause might apply, but exceptions exist, particularly for inherited properties. Contact the current 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 your mortgage has 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, especially in conventional home loans, as it protects lenders from loan assumption risks.

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

If you can’t 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, so review your specific mortgage terms and contact the mortgage’s current servicer to understand your options.