Quick answer
A due-on-sale clause is a provision in a mortgage that lets the lender, at its option, declare the whole loan due and payable if all or part of the property, or an interest in it, is sold or transferred without the lender’s prior written consent.
What it means when you sell
In an ordinary sale the clause never comes up, because your loan is paid off from the sale proceeds at closing. It matters when someone wants to take over the loan or take title while the loan stays in place. Most conventional loans include the clause in the security instrument — the mortgage or deed of trust — so they can’t simply be passed on. FHA and VA loans are assumable with approval instead.
Transfers the lender can’t use it against
The Garn–St Germain Act (12 U.S.C. 1701j-3) bars lenders from enforcing the clause on homes with fewer than five units when the transfer is:
- to a spouse or children who become owners of the property
- to a relative because the borrower died, or on the death of a joint tenant
- the result of a divorce decree or legal separation agreement
- into a living trust in which the borrower stays a beneficiary
- a second lien or other junior encumbrance that doesn’t transfer occupancy
- a lease of three years or less with no option to buy
Some of these protections depend on who lives in the home, so confirm with the servicer — or a real estate attorney — before transferring title. The home equity loan guide covers adding a second lien.
Sources
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