Key Takeaways
- Due on sale clauses demand full loan repayment upon property sale.
- They prevent unauthorized loan transfers without lender approval.
- This protects lenders from changes in ownership without consent.
- Be prepared to pay off the loan if you sell your home.
Article Summary
Due on sale is a mortgage contract clause that requires the full loan balance to be paid when the property is sold.
Due on Sale Clause: Explained in Plain English
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 Clauses
Frequently asked questions about due on sale clauses and how they affect property sales.
