The due on sale clause refers to that provision commonly found in a mortgage contract that requires the mortgage paid in full upon a sale or conveyance of the subject real estate that secures the lien. Mortgages with a due on sale clause are not assumable. The provision is all about protecting the lender’s interests. With this clause in place, when a house is sold, a seller cannot transfer the existing mortgage to the buyer. The sale proceeds must be applied to pay off the loan with the buyer arranging new financing to fund the new purchase.
As a practical matter, there is nothing untoward about a lender having such a provision. It remains sound business practice to know with whom you are dealing and making reasonably sure you will be paid back and when. Moreover, the vast majority of lenders have no choice. Banking laws and federal mandates require this provision to be in place and, by practice, broadly interpreted. As a result, these clauses are not only enforceable, but the broad scope of these provisions covers both sales and transfers including “transfers of real property subject to a real property loan by assumptions, installment land sales contracts, wraparound loans, contracts for deed, transfers subject to the mortgage or similar lien, and other like transfers”. (12 CFR 591.2) Land contracts are such a triggering event that may be enforced.
In 1982, Congress passed the Garn-St. Germain Depository Institutions Regulation Act which confirmed the enforceability of due on sale at the same time carving out several title transfer situations that will not trigger due on sale. One is if there is no due on sale, provisions omitted in older FHA and VA home loans. Another allows for the property owner to place a junior lien on the subject mortgage and not trigger the due on sale clause. When a surviving joint tenant takes title, the lender cannot call the note due. The same is true when the transfer is by inheritance or to a related owner occupant or to a spouse or child of a divorced co-owner. The last carved out exception avoiding the trigger of due on sale is when title is transferred into a living trust with the primary purpose of probate avoidance.
Applicable practice certainly muddies the water as opinions do vary.as to what triggers due on sale and what does not. It may be sound to consult with experienced counsel in the state where the real estate is located. Even lease options or land trusts, as alternatives to land contracts or other real estate transfers, may trigger a due on sale.
The practical import of all of this is that lenders just want their money and as long as they are getting paid on time, and as scheduled, many lenders will realize it would be bad business and foolish to enforce a due on sale or seek to extract assumption fees as they insist on a loan payoff. With all that lender’s agents have on their plate, not only do they have better things to do with their time and efforts so long as the loans are being timely paid, if they are kept in the dark, unaware of any tooled transfer that may otherwise trigger a due on sale, nothing likely is to happen with all parties being satisfied.