Legal Definitions - due-on-sale clause

A due-on-sale clause is a specific provision commonly found in loan agreements, particularly mortgages. It states that if the property or asset securing the loan is sold, transferred, or otherwise changes ownership, the entire outstanding balance of the loan becomes immediately due and payable to the lender.

This clause gives lenders the right to demand full repayment of the loan upon a transfer of ownership, preventing a new owner from simply taking over the existing loan, especially if that loan has a more favorable interest rate than current market conditions. It protects the lender's interest by ensuring they can reassess the loan terms or require full payment when the collateral's ownership changes.

Here are some examples illustrating how a due-on-sale clause works:

• Example 1: Traditional Home Sale
  Sarah has a mortgage on her house, which includes a due-on-sale clause. When she decides to sell her house to Mark, the clause is activated. This means that even if Mark wanted to assume Sarah's existing loan, the lender requires Sarah to pay off the entire outstanding balance of her mortgage at the time of the sale. The proceeds from the sale are then used to satisfy this debt before the property officially transfers to Mark.

• Example 2: Transferring Property to a Family Member
  John owns a vacation home with a mortgage that contains a due-on-sale clause. He decides to transfer ownership of the home to his adult daughter, Emily, as a gift, without any money changing hands. Even though it's not a traditional sale, transferring the deed to Emily triggers the due-on-sale clause. The lender could then demand that the entire remaining balance of John's mortgage be paid immediately, as there has been a change in ownership of the secured asset.

• Example 3: Adding a New Owner to the Deed
  Maria owns a property with a mortgage that includes a due-on-sale clause. She decides to go into a business partnership and, as part of their agreement, adds her partner's name to the property deed, granting them a partial ownership interest. By adding her business partner to the deed, Maria has transferred a portion of the property's ownership. This action could activate the due-on-sale clause, allowing the lender to require the full repayment of the mortgage loan, as the ownership structure of the collateral has changed without their prior consent.