Due-on-sale clause

A provision in a mortgage contract that requires that the mortgage be repaid in full upon a sale or conveyance of interest in the property that secures the mortgage. Mortgages with a due-on-sale clause are not assumable.

Investopedia Says:
A due-on-sale clause helps to protect the lender, or the ultimate holder of the mortgage, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage; the holders of a below-market-interest-rate mortgage - or a mortgage-backed security, asset-backed security, or collateralized debt obligation backed by a below-market-interest-rate mortgage - generally favor the early retirement of that mortgage.

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Provision in a conventional mortgage requiring payment of the unpaid loan balance if the property is sold. The mortgage cannot be transferred to another borrower (permitted in an Assumable Mortgage) without approval by the lender, and normally only at current market interest rates. The due-on-sale clause provides mortgage secondary market investors with a continuous supply of residential mortgages originated at market interest rates.

A provision in a Mortgage that states the loan is due upon the sale of the property.
Example: Collins owes on a $200,000 mortgage loan against her house at an 8% interest rate. She wants to sell the house to a buyer who will assume the mortgage. The lender says that the $200,000 loan is due upon the sale of the house so it cannot be assumed by the buyer. The lender adds that he will waive the due-on-sale provision if the interest rate is escalated to 10%.

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

Virtually all recent mortgages made in the United States contain a due-on-sale clause. This is in contrast to the wide availablility of assumable mortgages that were available in the past.

In real estate investing, the due-on-sale clause can be a concern for a property owner who wishes to extend seller financing to a potential buyer by using a wraparound mortgage. This arrangement triggers the due-on-sale clause of the seller's underlying mortgage and thus the lender may call the loan. In this case, if the seller doesn't have enough cash on hand to pay the full balance of the note, the bank could foreclose on the property. There is debate in the investing community as to how likely a bank is to actually call the loan due in such a situation. In the early 1980s, with interest rates at 18%, banks attempted to enforce these clauses, but in today's lending market banks are not likely to enforce it, and in fact will not enforce it unless they have another reason to call the loan.

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