Define: Due On Sale Clause

A due-on-sale clause, also known as an acceleration clause or alienation clause, is a provision commonly found in mortgage agreements that gives the lender the right to demand full repayment of the loan if the borrower sells or transfers the property to a new owner. This clause allows the lender to protect its interests by ensuring that the original terms of the mortgage, including interest rates and repayment terms, apply only to the borrower who originally obtained the loan. When a property is sold or transferred, the lender may require the borrower to pay off the remaining balance of the mortgage in full, typically within a specified timeframe.

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

Virtually all recent mortgages made in the United States contain a due-on-sale clause. This is in contrast to the wide availability of assumable mortgages that were available in the past.

In real estate investing, the due-on-sale clause can be a concern for a property owner who wishes to extend seller financing to a potential buyer by using a wraparound mortgage. This arrangement triggers the due-on-sale clause of the seller’s underlying mortgage and thus the lender may call the loan. In this case, if the seller doesn’t have enough cash on hand to pay the full balance of the note, the bank could foreclose on the property. There is debate in the investing community as to how likely a bank is to actually call the loan due in such a situation.

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This glossary post was last updated: 29th March 2024.