The Due-on-Sale Clause from the Perspective of an Experienced Bankruptcy & Real Estate Transactions Attorney

Understanding the intricacies of mortgage contracts is pivotal for both homeowners and potential buyers. One such integral aspect is the “due-on-sale clause”. With over 30 years of experience in the field, I’ll delve into the significance of this clause from a seasoned bankruptcy and real estate transactions attorney’s perspective.

What Exactly is a Due-on-Sale Clause?

A due-on-sale clause is a stipulation within mortgage agreements mandating the borrower to settle the outstanding amount with the lender should there be a sale or transfer of any interest in the property that collateralizes the mortgage. In essence, this means that the new buyer of the property cannot simply assume the previous owner’s mortgage.

Key Insights:

  • The crux of a due-on-sale clause is its mandate: if the property changes hands, the borrower has to repay the loan in its entirety.
  • Unlike the due-on-sale clause, an assumable mortgage empowers the new buyer to inherit the existing mortgage.
  • It’s noteworthy that even when this clause exists, there might be circumstances where lenders either can’t lawfully activate it or may opt not to.
  • Situations like divorce, separation, or inheritance typically don’t activate the due-on-sale clause, allowing the property to be transferred seamlessly.
  • A vast majority of mortgages in the U.S. are equipped with due-on-sale clauses. However, loans backed by certain federal agencies stand as exceptions.

This clause is essentially an acceleration clause, designed to protect lenders. It enables them to fast-track, or “accelerate,” a loan if specific borrower actions are identified.

Expert Insights from Attorney Joel R. Spivack:

Due-on-sale clauses are fundamentally incorporated to discourage homeowners from handing over their mortgage to subsequent buyers with the property or taking the loan with them to another house. Since mortgages are customarily linked to particular properties and their owners, lenders emphasize meticulous vetting. Consequently, most conventional mortgages have this clause to ensure each party gets its dedicated loan.

In the general sense, accelerating a mortgage implies that due to missed payments or contract breaches, the lender can demand immediate full loan payment or initiate foreclosure. But the due-on-sale acceleration is an ordinary facet of selling property. Homeowners typically utilize the sale proceeds to clear their loan, subsequently securing a new loan for their next property acquisition. The new buyers, in parallel, obtain their distinct home loan.

Certain mortgages, such as VA, USDA, and FHA loans, are devoid of the “due on sale” provision. The absence of such clauses in these mortgages stems from their transferability. Termed “assumable mortgages”, they allow buyers to inherit the seller’s existing loan. However, it’s paramount to understand that even if these loans are assumable, the lender mandates the new buyer to meet specified criteria. Mortgages generally can be transferred amidst unforeseen events like death and divorce.

What About Quitclaim Deeds?

A frequent question pertains to the use of quitclaim deeds in relation to the due-on-sale clause. Quitclaim deeds commonly facilitate property transfers without monetary exchange, often seen among family members. Yet, these deeds can pose challenges if the property has a due-on-sale clause. If a property undergoes transfer via a quitclaim deed, and no familial exception applies, the original owner could find themselves liable for the loan’s entire value.

Navigating the complexities of mortgages and their clauses demands expertise and a deep understanding of the field. Always consult with a seasoned attorney to ensure the best outcomes for your property transactions.  Contact Attorney Joel R. Spivack today either by filling out the online form, or call directly at 856-488-1200.

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Attorney Joel R. Spivack is an experienced bankruptcy and residential real estate transactions lawyer in Cherry Hill, New Jersey. Clients come to us for legal services, but what we really provide is peace of mind. For more than 30 years, Attorney Spivack has helped people make wise, informed decisions about bankruptcy filings, debt relief options and residential real estate transactions.
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