A due-on-sale clause is a clause in the loan that if signed binds the borrower to pay off the full balance of the loan if the buyer tries to sell the house. It applies when a buyer tries to sell, or transfer of ownership of the property. It acts as a safety net for the lender to exercise its right to the loan owed. It is dependent upon the will of the lender if they wish to exercise their right.
WHEN IS THE DUE-ON-SALE CLAUSE ENFORCED?
The time of sale or transfer of title. For example, Bubba the buyer has a house and he took out a loan from JF Morgoon Bank. Five years after living in the house, Bubba decides to sell the house. He is still paying the mortgage to JF. Forest Gump comes in as the buyer and asks Bubba to sell him the home. Bubba agrees. They draft the documents and the house is sold. JF Morgoon finds out, and they exercise their due on sale clause. Bubba has to immediately pay the loan balance to JF Morgoon.
In essence, the due on sale clause protects the lender. As the lender loses the collateral, it is at risk of not ever getting paid. Thus, the lender exercises the clause to get paid at the time the collateral is sold.
CAN I STOP THE ENFORCEMENT OF THE DUE-ON-SALE CLAUSE?
Unfortunately, the answer is no, you cannot! By law, this is the lender’s chance to recover the balance or amount you owe and they will exercise their right to do so.
WHAT HAPPENS IF THE LENDER ENFORCES THE DUE-ON-SALE CLAUSE?
The lender might notify the future buyer of the house that the loan amount is due immediately or can even foreclose your house to secure the owed balance.
IS DUE-ON-SALE CLAUSE A FORM OF LIEN?
No, it’s not, a lien is a hold on your property as a result of an unpaid balance or a borrowed loan against the title but a due-on-sale clause is a legal term from the lender’s point to force the borrower in making the required payment immediately.
WHAT ARE SOME EXCEPTIONS TO DUE-ON-SALE CLAUSE?
No Due-on-Sale Clause – This rarely happens! But if your lender did not mention the due-on-sale clause as part of your mortgage agreement, it cannot be enforced.
New Mortgages – It does not apply in cases of refinancing where the principal lender is paid the balance in full before the transfer of title.
Transfer to Surviving Joint Tenant – If the principal borrower dies and leaves the property to the surviving affiliate or co -borrower due-on-sale clause cannot be enforced.
Transfer by Inheritance –If a relative inherits property as per your will after death, the lender cannot use the due-on-sale clause cannot be enforced.
Transfer to Spouse or Child – If the property is transferred to upon rights of the spouse or child due-on-sale clause cannot be enforced.
Transfer on Divorce – In an event of separation or divorce, if the spouse is entitled to the property by law, this might be a common example in Texas, where Texas is a Community-Property state due-on-sale clause cannot be enforced.
Transfer to Living Trust – If the borrower is a beneficiary of the trust with ongoing right to occupy the property due-on-sale clause cannot be enforced.
CAN MY LENDER ENFORCE THE DUE-ON-SALE CLAUSE EVEN IF MY MORTGAGE PAYMENTS ARE ON TIME?
Surprisingly, the answer Is yes! The lender can foreclose on your property even if your mortgage payments were on time! It rarely happens though.
I HAVE A COMMERCIAL PROPERTY; CAN I ADD A DUE-ON-SALE CLAUSE?
A due -on-sale clause cannot be added to any forms of commercial real or non-residential property. Any trust transfers of commercial properties or land secured by a loan are considered a sale by lenders.