The Mortgage Due on Sale Clause

When you apply for a mortgage loan, your lender evaluates your income, credit and assets to ensure that you qualify for the mortgage before approving your application. To prevent you from transferring the loan to an individual who may not qualify and may miss payments, your lender will likely insert a “due on sale” clause into your mortgage contract.

How the Due on Sale Clause Works

A due on sale clause allows a mortgage lender to call due the entire balance of the loan whenever the homeowner sells or transfers the property. Some government-backed loans do not contain due on sale clauses.

Why the Due on Sale Clause is Necessary

Before the due on sale clause became standard mortgage industry procedure, homeowners could transfer their home loans to others without the bank’s prior approval. This allowed individuals who couldn’t qualify for a mortgage loan on their own to become homeowners and take advantage of the previous homeowner‘s interest rate. Unfortunately, it also resulted in a higher rate of default. Banks instituted the due on sale clause to reduce financial losses.

When the Due on Sale Clause Goes Into Effect

If you sell your home or attempt to transfer ownership, the bank can immediately request the full amount you owe on your mortgage loan. In some cases, lease to own options can also result in your lender facilitating the due on sale clause.