Due-on-Sale Clause
Contents
- Understanding the Due-on-Sale Clause
- A Closer Look:
- Key Insights:
- Deciphering How a Due-on-Sale Clause Functions
- Mechanism Explained:
- Mitigating Risks:
- Exceptions to Due-on-Sale Clauses
- Legislative Interventions:
- Exploring Mortgage Types Exempt from Due-on-Sale Clauses
- Notable Exceptions:
- Shedding Light on Specific Mortgage Scenarios
- Wrap-Around Loans:
- FHA and VA Loans:
- Property Transfers:
Unraveling the Due-on-Sale Clause: What You Need to Know
Understanding the Due-on-Sale Clause
A Closer Look:
A due-on-sale clause is a provision in mortgage contracts mandating full repayment of the loan upon the sale or transfer of the property securing the mortgage. This clause prevents mortgages from being assumable by new property buyers.
Key Insights:
- Due-on-sale clauses require borrowers to repay the lender when the property is sold, unlike assumable mortgages.
- Certain exceptions exist where lenders cannot enforce due-on-sale clauses, such as in cases of divorce, inheritance, or property transfer to a trust.
Deciphering How a Due-on-Sale Clause Functions
Mechanism Explained:
When a borrower sells a property with a due-on-sale clause, they must pay off the mortgage using the sale proceeds. This clause protects lenders from the risk of transferring mortgages to new owners at unfavorable interest rates.
Mitigating Risks:
Lenders may choose not to enforce due-on-sale clauses in weak housing markets or when property values decline significantly, opting to allow new buyers to assume existing mortgages.
Exceptions to Due-on-Sale Clauses
Legislative Interventions:
Under the Garn-St. Germain Act, lenders cannot invoke due-on-sale clauses in specific scenarios, such as during divorces, property transfers between spouses, or transfers to living trusts.
Exploring Mortgage Types Exempt from Due-on-Sale Clauses
Notable Exceptions:
Institutional mortgages typically include due-on-sale clauses, except for loans insured by federal agencies like the FHA, VA, or USDA, which allow assumption by new buyers.
Shedding Light on Specific Mortgage Scenarios
Wrap-Around Loans:
Wrap-around mortgages, common in home sales, trigger due-on-sale clauses if the original mortgage contains one, necessitating full repayment upon property sale.
FHA and VA Loans:
Mortgages insured by the FHA, VA, or USDA do not have due-on-sale clauses, enabling new buyers to assume existing loan obligations under certain conditions.