Due-on-sale clause

A due-on-sale clause gives a lender the right to demand immediate repayment of the entire balance if the property is sold or transferred without its consent.

It is standard in conventional mortgages, and it is the reason most conventional loans cannot be assumed. The clause exists so a lender is not stuck holding a below-market loan against a property owned by someone it never underwrote.

When it bites#

Any transfer of an interest in the property, subject to the statutory exemptions. Selling, obviously. But also less obvious transfers: adding someone to title, moving the property into an entity, or conveying an interest as part of a family arrangement.

Whether the lender acts is separate from whether it may. For years, with existing loans carrying rates at or above market, lenders frequently did not bother. When outstanding loans carry rates well below what a lender could get today, the incentive reverses.

The protected transfers#

Federal law exempts several categories, and they cover most ordinary life events:

• transfer to a relative on the death of the borrower
• transfer to a spouse or children
• transfer resulting from divorce or legal separation
• transfer into an inter vivos trust where the borrower remains a beneficiary and rights of occupancy do not change
• creation of a junior lien that does not transfer occupancy rights

These matter enormously in inherited property. A child inheriting a house is protected — the lender cannot call the loan simply because the parent died. That is worth knowing, because families frequently believe the opposite and sell under pressure they did not actually face.

Subject-to purchases#

Buying "subject to" an existing mortgage means taking the property while leaving the loan in the seller's name, and continuing to pay it.

It typically triggers the due-on-sale clause. Practitioners argue that lenders rarely act, and historically that has often been true. But the entire structure depends on a decision the lender is entitled to make at any moment, and the consequence of it acting is the full balance becoming due immediately.

The seller's position is worse still. They remain personally liable on a loan secured by a house they no longer own or control.

Estate planning implications#

The trust exemption is the one most worth acting on. A homeowner can generally move a property into a revocable living trust without triggering the clause, provided they remain a beneficiary and occupancy is unchanged.

That is a straightforward way to keep a house out of probate — which, given how often unprobated houses end in vacancy and forfeiture, is a larger benefit than it first appears.