A due-on-sale clause prevents a new buyer from benefiting from a previous homeowner’s mortgage contract. For example, a buyer with a low credit score may want to take over a loan with a low-interest rate that the previous homeowner has already paid off. However, 15 years ago, mortgage rates were much higher, and homes would transfer between the buyers and the homeowners. In this article, you will learn about the due-on-sale clause definition.

Contraindications

Due-on-sale clauses protect lenders from losing money when homeowners sell their homes. In addition, they prevent homeowners from transferring their debt to a new buyer without the lender’s consent. 

One common counter-argument is that sellers often transfer mortgages without permission. Many borrowers do not seek consent before deeding property. In some cases, the property may not need to be moved before the deed can change the title. If you decide to deed your property, you should check with your lender before making decisions.

Exemptions by lenders

The Act prohibits due-on-sale clauses when two parties or a single person owns the property. However, there are exemptions for the property’s title if the loan was obtained using a living trust or minor. 

The Federal Home Loan Bank Board (FHLBB) regulates real estate transfer. The list of prohibited transfers is short, but the rules can easily be broken. One of the most common problems in such transactions is selling property subject to a mortgage. Lenders can agree to an assumption of debt if the property’s current market value is below the outstanding debt amount. However, the purchaser is still responsible for paying the difference.

Although there are exceptions to the due-on-sale clause, there are still many limitations. For example, the due-on-sale clause does not apply to owner-financed transactions or transfers made upon divorce and death. In addition, some states have interpreted the exemptions to cover transfers to family members, not to mention spouses, children, and other non-related parties.

Legality

There are some common questions regarding the legality of due-on-sale provisions. These concerns include whether these provisions are permissible and the extent to which they apply to certain transfers. For example, due-on-sale clauses are not permitted to subordinate liens or a purchase-money security interest in household appliances. They are also invalid when the transferor dies or adds a child or spouse as an owner.

Due-on-sale clauses prevent homeowners from transferring their debt to an unknown third party. They also prevent homeowners from moving their debt to a new buyer. For example, poor credit ratings may want to take out a second mortgage to save money. But if a due-on-sale clause exists, the buyer can’t sell the home without the lender’s consent.

Disadvantages

Although Utah Rule R162-6.2.14 requires that real estate licensees disclose due-on-sale clauses, this rule does not prohibit them. Instead, it requires them to tell the potential consequences of such a clause. Therefore, a due-on-sale clause is an acceptable form of the transaction when used appropriately. 

The most common disadvantage of due-on-sale clauses is that they force homeowners to pay off their existing mortgages without a clear intention to repay them. When a homeowner sells their home without paying off the debt, the lender can foreclose on it without a buyer’s consent. This situation can be risky for both parties. However, a due-on-sale clause is beneficial to the lender in many ways. It allows the lender to protect itself from the risk of losing money.

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